Comprehensive annual financial report for the year ended June 30, ...

NORTH
CAROLINA
COMPREHENSIVE
ANNUAL
FINANCIAL
REPORT
FOR THE FISCAL YEAR
ENDED JUNE 30, 2002
MICHAEL F. EASLEY
GOVERNOR
ROBERT L. POWELL
STATE CONTROLLER
Prepared by Statewide Accounting Division
Office of the State Controller
http:// www. osc. state. nc. us
2 State of North Carolina
This report was prepared by the
Statewide Accounting Division of the North Carolina Office of the State Controller.
Don Waugh
ASSISTANT STATE CONTROLLER
dwaugh@ mail. osc. state. nc. us
Anne Godwin, CPA
Statewide Accounting Manager
agodwin@ mail. osc. state. nc. us
John Barfield, CPA
Financial Reporting Manager
jbarfiel@ mail. osc. state. nc. us
Amber Young
Central Compliance Manager
ayoung@ mail. osc. state. nc. us
Statewide Accounting Division Staff
Robert Alford, CPA Darlene Langston, CPA Shirley Trollinger
Ann Anderson Clayton Murphy, CPA Cynthia Vincent
John Eliadis Terri Noblin, CPA Helen Vozzo, CPA
Luke Harris Cindy Salgado, CPA Pam White, CPA
Martha Hunt, CPA Carmen Stanley, CPA
Cathy Johnson Melody Tart
Special appreciation is given to the chief fiscal officers and the dedicated accounting personnel throughout the State.
Their efforts to contribute accurate and timely financial data for their agencies, universities, community colleges, and
institutions made this report possible.
State of North Carolina 3
MICHAEL F. EASLEY
Governor of North Carolina
4 State of North Carolina
TABLE OF CONTENTS
Comprehensive Annual Financial Report
For the Fiscal Year Ended June 30, 2002
INTRODUCTORY SECTION
Letter of Transmittal.................................................................................................................... ..................................................................................................
Certificate of Achievement for Excellence in Financial Reporting...................................................................................................................... .........................
Organization of North Carolina State Government, including principal State officials.................................................................................................................
FINANCIAL SECTION
Report of Independent Auditor........................................................................................................................ ..............................................................................
Management's Discussion and Analysis....................................................................................................................... .................................................................
Basic Financial Statements
Government- wide Financial Statements
Statement of Net Assets — Exhibit A- 1.............................................................................................................................. ..........................................................
Statement of Activities — Exhibit A- 2.............................................................................................................................. ...........................................................
Fund Financial Statements
Balance Sheet— Governmental Funds — Exhibit B- 1.............................................................................................................................. .....................................
Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets — Exhibit B- 1a..................................................................................
Statement of Revenues, Expenditures, and Changes in Fund Balances— Governmental Funds — Exhibit B- 2............................................................................
Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances
of Governmental Funds to the Statement of Activities — Exhibit B- 2a............................................................................................................................. ...
Statement of Net Assets— Proprietary Funds — Exhibit B- 3.............................................................................................................................. .........................
Statement of Revenues, Expenses, and Changes in Fund Net Assets— Proprietary Funds — Exhibit B- 4....................................................................................
Statement of Cash Flows— Proprietary Funds — Exhibit B- 5.............................................................................................................................. ........................
Statement of Fiduciary Net Assets— Fiduciary Funds — Exhibit B- 6.............................................................................................................................. ............
Statement of Changes in Fiduciary Net Assets— Fiduciary Funds — Exhibit B- 7...................................................................................................................
Notes to the Financial Statements..................................................................................................................... .............................................................................
Required Supplementary Information
Schedules of Funding Progress— All Defined Benefit Pension Trust Funds.......................................................................................................................... ......
Schedule of Contributions from the Employers and Other Contributing Entities— All Defined Benefit Pension Trust Funds....................................................
Schedule of Revenues, Expenditures and Changes in Unreserved Fund Balances— Budget and Actual
—( Budgetary Basis— Non- GAAP) General Fund........................................................................................................................... ......................................
Notes to Required Supplementary Information— General Fund Budgetary Reporting..................................................................................................................
Combining Fund Statements and Schedules
Nonmajor Governmental Funds
Combining Balance Sheet— Nonmajor Governmental Funds — Exhibit C- 1.............................................................................................................................. .
Combining Statement of Revenues, Expenditures, and Changes in Fund Balances— Nonmajor Governmental Funds — Exhibit C- 2........................................
Combining Balance Sheet— Nonmajor Special Revenue Funds — Exhibit C- 3............................................................................................................................
Combining Statement of Revenues, Expenditures, and Changes in Fund Balances— Nonmajor Special Revenue Funds — Exhibit C- 4....................................
Combining Schedule of Revenues, Expenditures and Changes in Unreserved Fund Balances
— Budget and Actual ( Budgetary Basis— Non- GAAP) Nonmajor Special Revenue Funds — Exhibit C- 5......................................................................
Combining Balance Sheet— Nonmajor Capital Projects Funds — Exhibit C- 6.............................................................................................................................
Combining Statement of Revenues, Expenditures, and Changes in Fund Balances— Nonmajor Capital Projects Funds — Exhibit C- 7.....................................
Combining Balance Sheet— Nonmajor Permanent Funds — Exhibit C- 8.............................................................................................................................. ......
Combining Statement of Revenues, Expenditures, and Changes in Fund Balances— Nonmajor Permanent Funds — Exhibit C- 9.............................................
Proprietary Funds
Nonmajor Enterprise Funds
Combining Statement of Net Assets— Nonmajor Enterprise Funds — Exhibit D- 1......................................................................................................................
Combining Statement of Revenues, Expenses, and Changes in Fund Net Assets— Nonmajor Enterprise Funds — Exhibit D- 2.................................................
Combining Statement of Cash Flows— Nonmajor Enterprise Funds — Exhibit D- 3....................................................................................................................
Internal Service Funds
Combining Statement of Net Assets— Internal Service Funds — Exhibit E- 1..............................................................................................................................
Combining Statement of Revenues, Expenses, and Changes in Fund Net Assets— Internal Service Funds — Exhibit E- 2..........................................................
Combining Statement of Cash Flows— Internal Service Funds — Exhibit E- 3.............................................................................................................................
Fiduciary Funds
Combining Statement of Fiduciary Net Assets— Private Purpose Trust Funds — Exhibit F- 1.....................................................................................................
Combining Statement of Changes in Fiduciary Net Assets— Private Purpose Trust Funds — Exhibit F- 2.............................................................................
Combining Statement of Changes in Assets and Liabilities— Agency Funds — Exhibit F- 3........................................................................................................
State of North Carolina
Comprehensive Annual Financial Report
For the Fiscal Year Ended June 30, 2002
STATISTICAL SECTION
Revenues by Source and Expenditures by Function— All Governmental Fund Types ( GAAP Basis) — Table 1.........................................................................
Schedule of Revenues by Source— General Fund ( GAAP Basis) — Table 2.............................................................................................................................. .
General Obligation Bonds Debt Ratios — Table 3.............................................................................................................................. ..........................................
Revenue Bond Coverage — Table 4.............................................................................................................................. ................................................................
Schedule of General Obligation Bonds Payable — Table 5.............................................................................................................................. ............................
Statewide Assessed Property Values— Real Property, Tangible Personal Property and Public Service Companies — Table 6...................................................
Schedule of Bank and Savings and Loan Deposits of Financial Institutions Located in North Carolina — Table 7.....................................................................
Cash Receipts from Farming by Commodities — Table 8.............................................................................................................................. ..............................
Major Private Employers in North Carolina — Table 9.............................................................................................................................. ..................................
Schedule of Demographic Data — Table 10............................................................................................................................. ....................................................
Ten Largest Non- Agricultural Industries by Number of Employees — Table 11..........................................................................................................................
Required Supplementary Information— Claims Development Information — Public School Insurance Fund — Table 12.........................................................
Total Number of State Government Permanent Positions Funded in the State Budget by Agency — Table 13............................................................................
Schedule of Miscellaneous Statistics — Table 14............................................................................................................................. ............................................
6 State of North Carolina
THIS PAGE INTENTIONALLY LEFT BLANK.
INTRODUCTORY
SECTION
State of North Carolina
Office of the State Controller
Michael F. Easley, Governor Robert L. Powell, State Controller
MAILING ADDRESS
1410 Mail Service Center
Raleigh, NC 27699- 1410
Telephone: ( 919) 981- 5454
Fax Number: ( 919) 981- 5567
State Courier: 56- 50- 10
LOCATION
3512 Bush Street
Raleigh, NC
Website: www. osc. state. nc. us
An Equal Opportunity/ Affirmative Action/ Americans With Disabilities Employer
The Honorable Michael F. Easley, Governor
Members of the North Carolina General Assembly
Citizens of North Carolina
It is our pleasure to furnish you with the 2002 Comprehensive Annual Financial Report ( CAFR) of the State of North
Carolina in compliance with G. S. 143B- 426.39. This report has been prepared by the Office of the State Controller.
Responsibility for both the accuracy of the data and the completeness and fairness of the presentation, including all disclosures,
rests with the State government and this office. To the best of our knowledge and belief, this financial report is complete and
reliable in all material respects. We believe all disclosures necessary to enable you to gain an understanding of the State's
financial activities have been included.
Although the State budgets and manages its financial affairs on the cash basis of accounting, G. S. 143- 20.1 requires the
Office of the State Controller to prepare a comprehensive annual financial report ( CAFR) in accordance with generally
accepted accounting principles in the United States of America ( GAAP). Except for exhibits and notes clearly labeled
otherwise, this CAFR has been prepared in accordance with GAAP.
For the convenience of users we have divided this comprehensive annual financial report into three major sections,
described as follows:
The introductory section includes this transmittal letter and the State's organization chart, including a listing of principal
State officials.
The financial section includes management discussion and analysis, the basic financial statements ( government- wide
financial statements, fund financial statements, and notes), other required supplementary information, the combining and
individual fund financial statements, and schedules.
The statistical section includes selected financial, non- financial and demographic information, much of which is
presented on a ten- year basis, as well as required supplementary information.
Management of the government is responsible for establishing and maintaining an internal control structure designed to
ensure that the assets of the State are protected from loss, theft or misuse and to ensure that adequate accounting data are
compiled to allow for the preparation of financial statements in conformity with generally accepted accounting principles. The
internal control structure is designed to provide reasonable, but not absolute, assurance that these objectives are met. The
concept of reasonable assurance recognizes that: ( 1) the cost of a control should not exceed the benefits likely to be derived,
and ( 2) the valuation of costs and benefits requires estimates and judgments by management.
GASB Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and
Local Governments, requires that management provide a narrative introduction, overview and analysis to accompany the Basic
Financial Statements in the form of management discussion and analysis ( MD& A). This letter of transmittal is intended to
complement MD& A and should be read in conjunction with it. The MD& A can be found immediately following the
Independent Auditor’s Report.
State of North Carolina 9
Profile of the Government
The State of North Carolina entity as reported in the CAFR includes all fund types of the
departments, agencies, boards, commissions and authorities governed and legally controlled by
the State's executive, legislative and judicial branches. In addition, the reporting entity includes
legally separate component units for which the State is financially accountable. The component
units are discretely presented in the government- wide financial statements. The State's discretely
presented major component units are the University of North Carolina System; the State's
community colleges; Golden LEAF, North Carolina Housing Finance Agency, and North
Carolina State Education Assistance Authority. The criteria for inclusion in the reporting entity
and its presentation are defined by the Governmental Accounting Standards Board ( GASB) in
its GASB Codification Section 2100. These criteria are described in Note 1 of the
accompanying financial statements.
The State and its component units provide a broad range of services to its citizens,
including public education; higher education; health and human services; economic
development; environment and natural resources; public safety, corrections, and regulation;
transportation; agriculture; and general government services. The costs of these services are
reflected in detail and in summary in this report.
In addition to internal controls discussed previously, the State maintains budgetary controls.
The objective of these budgetary controls is to ensure compliance with legal provisions
embodied in the annual appropriated budget approved by the General Assembly. Activities of
the General Fund and most departmental special revenue funds are included in the annual
appropriated budget. The State Highway Fund and the Highway Trust Fund, the State's major
special revenue funds, are primarily budgeted on a multi- year basis. Capital projects are funded
and planned in accordance with the time it will take to complete the project. The level of
budgetary control ( that is, the level at which expenditures cannot legally exceed the appropriated
amount) is exercised at both the departmental and university level by way of quarterly allotments,
with allotment control exercised by the State Controller, and on the program line- item levels
requiring certain approvals by the Director of the Budget. Legislative authorization of
departmental expenditures appears in the State Appropriation Bill. This " Certified Budget" is
the legal expenditure authority; however, the Office of State Budget and Management ( OSBM)
may approve executive changes to the legal budget. This results in the " Final Budget" presented
in the required supplementary information.
Economic Condition and Outlook
The primary factors affecting the nation’s economy during the period ending June 30, 2002
were the terrorist attacks of September 11 and the continuing impact of the stock market crash.
During the summer of 2001, economists were noting that the economy seemed to be
recovering from the slowdown that had begun the past winter. This seemingly optimistic
viewpoint was supported by a number of indicators including the monthly survey of purchasing
managers, falling energy prices, federal tax cuts robust housing refinancing activity, and stable
consumer spending.
The optimism vanished on September 11. The first impact of the terrorist actions was a
sharp drop in consumer spending during the latter part of September as consumer confidence
dropped by 20 percentage points. When retail activity slowed, manufacturers discovered they
had excess inventory and began paring production. This led to fewer hours for workers and
eventually forced layoffs. The loss of income led workers to cut back on spending even more
and the downward spiral typical of a recession had begun.
State Reporting
Entity and
Its Services
Budgetary
Control
National
Situation
10 State of North Carolina
Compounding the problem was the prolonged pullback in capital spending. The trigger for
this decision by executives was the fact that the 2000- 2002 economy was characterized by the
steepest decline in corporate profits in over five decades. This factor, coupled with the crash of
technology and telecommunications stocks beginning in March 2000, led companies to reduce
spending on new facilities and equipment, even in the face of very favorable interest rates.
The recovery from the events of September 11 has been the most sluggish in decades. The
first stage of the turnaround, beginning last November, was fueled by a combination of additional
interest rate cuts, rapid money supply growth, and aggressive fiscal policy ( tax cuts, federal
disaster assistance). In addition, the level of business inventories fell by a record amount during
the fourth quarter of 2001, setting the stage for a ramping up of production.
Around March of this year, the recovery began to experience what some economists are
calling a “ soft spot.” This loss of momentum was similar to the temporary slowdown
experienced in late 1991, just six months after the beginning of the recovery from the Gulf War.
In fact, the 1991- 93 recovery stalled out three times before a more permanent acceleration took
place in mid- 1993.
At the end of the 2001- 02 fiscal year economic indicators were starting to show signs of
improvement. Examples included unemployment claims, retail activity, money supply growth,
and record refinancing activity due to the lowest mortgage rates in 40 years. This led many
economists to forecast 3- 4% real ( inflation- adjusted) economic growth for the second half of the
calendar year.
There is reason for concern about the fragility of the recovery even though positive signs
are popping up every day. First is the continued weakness in equity prices, especially for
NASDAQ stocks ( down 76% from their 2000 peak). This has devastated the value of 401( k)
balances and other sources of savings, causing a drop in consumer confidence. This pattern is
the converse of the 1995- 99 experience, when skyrocketing stock prices provided fuel for a
consumer spending binge through the “ wealth effect.”
In addition, investors and consumers have been shaken by the accounting fraud and the
potential military action against Iraq. A final concern is the mountain of debt taken on by
consumers and businesses during the favorable impact of the free- spending 1990s. To date, the
debt overhang for individuals has not been a problem due to the impact of low mortgage rates on
the demand for housing and incentive- driven demand for vehicles. Once refinancing slows and
the bubble in housing prices breaks, the underpinning for the unusually stable spending levels
during this recession may evaporate.
The final issue has to do with the prolonged decline in business investment. Many
manufacturers continue to experience excess capacity and add new facilities until demand
improves. In addition, they are reluctant to rehire laid off workers, preferring to extend the
workweek of the employees and bring in temporary workers. Until a major turnaround in stock
prices occurs or we get additional federal monetary or fiscal stimulus, we think that the national
recovery will continue to be sluggish. The good news is that the combination of depressed
inventories and historically low interest rates should prevent the economy from going back into a
recession.
State of North Carolina 11
One of the primary characteristics of the 2001 recession was the impact on the
manufacturing sector. This is important to North Carolina because 18% of nonagricultural
employment is in manufacturing in our state versus 12% nationally. A more important measure
might be the share of gross state product tied to manufacturing: around 23% in North Carolina
versus 17% for the United States.
The decline in manufacturing jobs did not begin with the 2001 recession. Data compiled
by the Employment Security Commission show that manufacturing experienced a fairly rapid
recovery from the 1990- 91 recession, with job growth of 2.6% in 1993. In fact, the “ boom and
bust” nature of manufacturing is one reason why the state’s economy grew 33% faster than the
national experience following the 1981- 82 recession and 45% faster following the Gulf War
downturn. In fact, North Carolina was the fifth fastest growing state during the 1992- 94 period.
Manufacturing employment began a steady decline in mid- 1995 as the national economy
experienced a mild slowdown following the Fed rate hikes in 1994. The rate of decline began to
accelerate in February 2001 and peaked at an 8.5% year- over- year rate in late 2001. Particularly
hard hit were the textile and apparel sectors, dropping over 15% annually by the spring of 2001.
There are some signs that the state’s economy has begun to improve. For one thing, the
unemployment rate has dropped from 6.9% in April to 6.0% in October and we have seen
improvement in the unemployment claims numbers. State sales tax receipts during the quarter
ending September 30 were up 1.7% over the same quarter last year and increased 2.3% during
the second calendar quarter. This compares to - 2.0% for the first quarter and - 3.5% for the final
quarter of 2001. Unit sales of cars and light trucks rose 2.9% in May and June this year. Finally,
real estate conveyance tax collections, levied on a “ percent of value” basis, continue to benefit
from favorable mortgage rates.
Even with the recent improvements, the State is budgeting on the basis of a continued
sluggish recovery. This would be very different from the explosive growth after the last two
recessions. One reason is the continued weakness of tech stock prices. As the state has
diversified away from the traditional manufacturing industries ( textiles, apparel, furniture, and
tobacco) to electronics and other technology- oriented companies, we have become more
vulnerable to problems in the new sectors.
A classic example is the experience of the Catawba Valley region ( Hickory). During the
late- 1990s, this area had an unemployment rate as low as 1.5% due to the explosive growth of
fiber optic manufacturing. Now, the unemployment rate in this county is 9.4%, one of the
highest rates in the state. We are concerned that it may take some time for the nation’s
telecommunications companies to work down excess inventory.
State
Prospects
12 State of North Carolina
In addition, it is not clear how areas affected by the displacement of workers in traditional
industries will recover. The prevailing view of many local officials is that not only are the jobs
lost in recent years the textile, apparel, and furniture sectors gone forever but the shift away from
U. S. production is spreading to other types of manufacturing operations.
Key Economic Forecast Variables
(% Change Unless Noted)
Fiscal Year 2001- 2002
Actual
Fiscal Year 2002- 2003
Budgeted
National
Real Economic Growth* 1.9% 1.4%
Real Consumer Spending* 3.0% 2.1%
Industrial Production - 4.0% 0.6%
Nominal Personal Income 3.3% 1.9%
Consumer Price Index 1.8% 2.3%
Short- Term Interest Rates 2.3% 1.8%
Pre- Tax Profits ( Calendar Yr.) - 17.9% - 7.5%
North Carolina
Total Employment - 1.1% - 1.4%
Manufacturing Employment - 7.1% - 4.5%
Unemployment Rate 6.3% 7.4%
Personal Income 1.3% 1.8%
* Adjusted for inflation
— Economic analysis prepared by David Crotts
Fiscal Research Division
North Carolina General Assembly
November 15, 2002
State of North Carolina 13
Issues and Observations
During fiscal year 2002, the Governor, the General Assembly, and the departments and
agencies of State government worked to address key issues facing State government and the
citizens of North Carolina.
While this report presents the financial condition of the State on a GAAP basis, it is
important to note some of the budget and program realities that contributed to our current
condition. With the adoption of the General Fund budget for fiscal year ended June 30, 2003,
North Carolina will have experienced its third straight year in which spending needs exceeded
recurring revenues. This problem has been increased by the economic downturn experienced
nationally and in North Carolina. The increase in spending needs is attributed to enrollment
growth in the public schools and higher education institutions along with continued increased
costs in the health and human services areas such as Medicaid and children services. The result
is that North Carolina has spent more money than it has realized in the General Fund during the
last four consecutive years.
In order to meet the constitutional requirement of a balanced budget for the General Fund,
the Governor has exercised his constitutional powers through the enactment of Executive Orders
to control spending and to identify resources to meet spending requirements. Among these
resources are the Highway Trust Fund, the Tobacco Trust Fund, agency special funds, and
reductions to employer contributions to some of the State retirement systems. State agencies and
institutions have been operating under Executive Orders since February 2001. The current
Executive Order allows spending at an average of 96.5% of the authorized General Fund budget
for fiscal year 2003.
Because of the budget shortfalls, the need to use State reserves, and the inability to
replenish reserves, the result has been an overall reduction in the net worth of the General Fund
( GAAP basis) component of the State budget. In the last three years, the unreserved balance has
gradually declined to its current level of negative $ 575 million for the fiscal year ended June 30,
2002. The Savings Reserve Account balance was used to balance the budget in fiscal year 2001,
and the General Assembly authorized new funds to replenish that reserve in fiscal year 2002. But
the Savings Reserve Account balance again was required to manage the budget shortfall for
fiscal year 2002. As of June 30, 2002, the Savings Reserve had a zero balance.
For fiscal year 2003 through December 11, $ 215.6 million has been set aside in the
Governor’s Executive Order Reserve and is available to manage any potential budget shortfall
that may occur. It is important to note, however, that some of these funds will be needed for the
continued recovery of eastern North Carolina from the aftermath of Hurricane Floyd. This
Reserve coupled with spending restrictions and zero economic revenue growth are the tools the
Governor is using to manage the 2003 budget.
In August 2002, Moody’s investors service advised North Carolina of a downgrade in its
credit from AAA to Aa1 representing the first time since 1960 that North Carolina had less than
AAA credit. Moody’s advised that the North Carolina budget had been under too much financial
strain for too long and that the North Carolina economy was not sufficient to retain our rating at
this time While the rating service praised the strength of executive powers available to insure a
balanced budget, they cited lack of structural balance, a weakened GAAP balance sheet, and the
continued reliance on non- recurring resources as major factors in the downgrade. They made
specific note of the reversal of GAAP balances that have reversed from positives to negatives in
a relatively short period of time.
Challenges continue to exist for State government financial and program managers as we
move further into this decade. The Governor will propose his 2003- 05 budget to the 2003
Session of the General Assembly and many of the fiscal issues will continue into this legislative
Fiscal
Accountability
and Reporting
14 State of North Carolina
session. More discussion of the financial issues of North Carolina can be found in the
Management’s Discussion and Analysis ( MD& A) section of this document.
Financial Information
The MD& A provides an overview of the State’s financial activities addressing both
governmental and business- type activities reported in the government- wide financial statements.
In addition, MD& A focuses on the State’s major funds: the General Fund, the Highway Fund and
the Highway Trust Fund.
Pensions. The State contributes to the Teachers' and State Employees' Retirement System, the
Consolidated Judicial Retirement System, the Legislative Retirement System, the Firemen's and
Rescue Squad Workers' Pension Fund, the Supplemental Retirement Income Plan of North
Carolina, and the North Carolina National Guard Pension Fund. The Local Governmental
Employees' Retirement System is administered by the State but the State is not a participant.
The retirement systems experienced a total return from investments of - 4.34% for the one-year
period, a return of 0.62% for the three- year period and a return of 5.97% for the five- year
period, ended June 30, 2002. These returns are among the better results for public pension plans
in the United States, and reflect the conservative asset allocation and attention to investment
quality that have guided the plans investment policy. Recent reports indicate that the North
Carolina Retirement System investment performance ( all pension plans under management) was
among the top 12% of all public plans for the last 12 months, and among the top 9% for the past
five years for the period ended September 30, 2002.
The Teachers' and State Employees' Retirement System ( TSERS), the largest of the pension
trust funds, continued to be fully funded, based on the December 31, 2001 actuarial valuation.
Specifically, the TSERS was funded at 111.6%, with the actuarial value of assets of $ 42.1 billion
exceeding the actuarial accrued liability of $ 37.7 billion by $ 4.4 billion at December 31, 2001.
Employer contributions to the TSERS decreased by $ 110.3 million, or 35.7% from the prior
fiscal year. Investment balances declined by $ 2.8 billion, or 6.3% from the prior fiscal year, with
a net investment income loss of $ 1.9 billion representing a decline in net earnings of $ 811
million, or 75.3% from the prior year. The TSERS experienced a $ 130.8 million increase in
benefit payments to retirees, an increase of 7.7% from fiscal year 2001.
Employee and Retiree Health Insurance. The State Health Plan ( reported as a component unit
for fiscal year 2001) provides comprehensive major medical care for employees and retirees of
the State and its participating component units, and it allows for optional coverage of employee
and retirees' dependents. This care is also extended to employees and retirees of the Local
Education Agencies ( LEAs), which are not part of the State's reporting entity. Coverage is self-funded
by contributions to the State Health Plan ( the Plan), a proprietary component unit of the
State. Contributions for employee and retiree coverage are made by the State, its participating
component units, and LEAs. Contributions for dependent coverage are made by employees and
retirees. Coverage is also extended to certain individuals as an other postemployment benefit.
The Plan pays most expenses that are medically necessary and eligible for coverage based on
usual, customary and reasonable allowances. Claims are subject to specified annual deductible
and copayment requirements. The Plan disallows claims in excess of a lifetime maximum of $ 5
million.
As of July 1, 2001, an estimated $ 240 to $ 300 million of cost savings for the State Health
Plan were implemented in the form of increased insurance premiums, reduction of benefits to
employees and dependents, and in the form of cuts in payments to providers. The State Health
Plan pays 100% of the health insurance premium for employees and retirees, but employees and
Pension
and Other
Post-employment
Benefits
State of North Carolina 15
retirees must pay for optional family or dependent coverage. Employer contributions account for
80% of State Health Plan funding. Effective October 1, 2001, the insurance premium for
dependent coverage rose by 30%. Net assets increased from a negative $ 159.7 million at June
30, 2001 to a negative $ 99.4 million at June 30, 2002, an increase ( deficit decrease) of $ 60.3
million, or 37.7%, with premium revenues for fiscal year 2002 rising to $ 1.27 billion, an increase
of $ 331.1 million, or 35.3%. For fiscal year 2002, claims and benefits totaled $ 1.18 billion, an
increase of $ 54.5 million, or 4.8%.
Historically, the State's health benefits package has been a key component of an overall
compensation package enabling the State to hire and retain quality personnel.
The State’s general obligation bonds are rated Aa1 by Moody’s, AAA by Standard &
Poors, and AAA by Fitch. During the fiscal year, Moody’s Investors Services downgraded the
State of North Carolina’s general obligation rating to Aa1, from AAA. According to Moody’s,
the primary reasons for the downgrade were the State’s continued budget pressure, reliance on
non- recurring revenues, and weakened balance sheet. Also, Moody’s commented that the task of
restoring structural budget balance and rebuilding reserves faces political and economic
obstacles.
The favorable ratings have enabled the State to sell its bonds at interest rates considerably
below the Bond Buyer's Index, thereby providing substantial savings to North Carolina
taxpayers. Approximately 25 percent of all AAA ratings for state and local governments
nationwide are located in North Carolina.
It is the policy of the State that all agencies, institutions, departments, bureaus, boards,
commissions and officers of the State shall devise techniques and procedures for the receipt,
deposit and disbursement of monies coming into their control and custody which are designed to
maximize interest- bearing investment of cash, and to minimize idle and nonproductive cash
balances. The State Controller, with the advice and assistance of the State Treasurer, the State
Budget Officer, and the State Auditor, develops, implements, and amends the Statewide Cash
Management Policy. All cash deposited with the State Treasurer by State entities is managed in
pooled investment accounts to maximize interest earnings. During fiscal year 2002,
uncommitted State funds were invested in short- term and medium- term U. S. Government notes
and bonds, as well as other deposits, which had a composite average yield of 5.38%.
The State maintains self- insurance programs for employee health; general liability; medical
malpractice; workers’ compensation; and automobile, fire and other property losses. The State
limits its risk for general liability; medical malpractice; and automobile fire and other property
losses by purchasing private insurance for losses in excess of deductibles. See Note 12 of the
Notes to the Financial Statements for a full description of the State's risk management program.
Other Information
In compliance with State statute, an annual financial audit of the State reporting entity is
completed each year by the North Carolina Office of the State Auditor. The Auditor's
examination was conducted in accordance with auditing standards generally accepted in the
United States of America and the standards applicable to financial audits contained in
Government Auditing Standards, issued by the Comptroller General of the United States, and his
opinion has been included in this report. In addition, the State coordinates the Single Audit effort
of all federal funds through the State Auditor.
Debt
Administration
Cash
Management
Risk
Management
Independent
Audit
16 State of North Carolina
The Government Finance Officers Association of the United States and Canada ( GFOA)
awarded a Certificate of Achievement for Excellence in Financial Reporting to the State of North
Carolina for its comprehensive annual financial report ( CAFR) for the fiscal year ended June 30,
2001. The Certificate of Achievement is a prestigious national award recognizing conformance
with the highest standards for preparation of state and local government financial reports.
In order to be awarded a Certificate of Achievement, a government unit must publish an
easily readable and efficiently organized comprehensive annual financial report, whose contents
conform to program standards. The CAFR must satisfy both generally accepted accounting
principles and applicable legal requirements.
A Certificate of Achievement is valid for a period of one year only. We believe our current
report continues to conform to the Certificate of Achievement program requirements, and we are
submitting it to GFOA.
In conclusion, we believe this report provides useful data to all parties using it in evaluating
the financial activity of the State of North Carolina. We in the Office of the State Controller
express our appreciation to the financial officers throughout State government and to the Office
of the State Auditor for their dedicated efforts in assisting us in the preparation of this report.
Any questions concerning the information contained in this Comprehensive Annual Financial
Report should be directed to the Office of the State Controller at ( 919) 981- 5454.
Respectfully submitted,
Robert L. Powell
State Controller
December 12, 2002
Certificate of
Achievement
Acknowledgments
State of North Carolina 17
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CERTIFICATE OF ACHIEVEMENT
20 State of North Carolina
ORGANIZATION OF NORTH CAROLINA STATE GOVERNMENT
INCLUDING PRINCIPAL STATE OFFICIALS
EXECUTIVE BRANCH
Council of State
Governor
Michael F. Easley
Lieutenant Governor
Beverly E. Perdue
Secretary of State
Elaine F. Marshall
State Auditor
Ralph Campbell, Jr.
State Treasurer
Richard H. Moore
Superintendent of
Public Instruction
Dr. Michael E. Ward
Attorney General
Roy A. Cooper, III
Commissioner of
Agriculture
Meg Scott Phipps
Commissioner of
Labor
Cherie K. Berry
Commissioner of
Insurance
James E. Long
Cabinet Secretaries — Appointed by the Governor
Administration
Gywnn T. Swinson
Correction
Theodis Beck
Crime Control and
Public Safety
Bryan E. Beatty
Cultural Resources
Lisbeth C. Evans
Commerce
James T. Fain
Environment
& Natural Resources
William G. Ross, Jr.
Health and Human
Services
Carmen Hooker Odom
Revenue
E. Norris Tolson
Transportation
W. Lyndo Tippett
Appointed by Governor, confirmed by Legislature
Office of the
State Controller
Robert L. Powell
State Controller
State Board
of Education
Phillip J. Kirk, Jr.
Chairman
H. Martin Lancaster
President
Molly C. Broad
President
Appointed by University
Board of Governors
Appointed by State Board
of Community Colleges
Juvenile Justice and
Delinquency Prevention
George L. Sweat
State of North Carolina 21
LEGISLATIVE BRANCH JUDICIAL BRANCH
Component Units
State of North Carolina Web Page
http:// www. ncgov. com
North Carolina
Supreme Court
Chief Justice
I. Beverly Lake, Jr.
Associate Justices
G. K. Butterfield, Jr.
Robert H. Edmunds, Jr.
Robert F. Orr
Mark D. Martin
Sarah Parker
George L. Wainwright, Jr.
Administrative
Office of the Courts
John Kennedy
Director
University of North
Carolina System
Community Colleges State Education
Assistance Authority
General Assembly
Senate
House of
Representatives
Speaker
James B. Black
Speaker Pro Tempore
Joe Hackney
Majority Leader
Philip A. Baddour
Minority Leader
N. Leo Daughtry
President
Lieutenant Governor
President Pro Tempore
Marc Basnight
Deputy Pres. Pro Tempore
Frank W. Ballance, Jr.
Majority Leader
Tony Rand
Minority Leader
Patrick J. Ballentine
Golden LEAF NC Housing Finance
Agency
Other Component
Units
22 State of North Carolina
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FINANCIAL
SECTION
24 State of North Carolina
State of North Carolina 25
26 State of North Carolina
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MANAGEMENT’S
DISCUSSION AND
ANALYSIS
28 State of North Carolina
Highlights
MANAGEMENT'S DISCUSSION AND ANALYSIS ( MD& A)
The following is a discussion and analysis of the State of North Carolina’s ( the State’s) financial
performance, providing an overview of the activities for the fiscal year ended June 30, 2002. Please
read it in conjunction with the transmittal letter at the front of this report and with the State's financial
statements, which follow this section. Because fiscal year 2002 represents the first year in which the
State implemented the provisions of Governmental Accounting Standards Board ( GASB) Statement
No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local
Governments, this discussion and analysis provides few comparisons with the previous year. Future
reports are required to include extensive comparisons.
Government- wide:
 The State’s total net assets remained virtually unchanged as a result of this year’s operations.
While net assets of governmental activities increased by $ 562 million, or nearly 2.6 percent, net
assets of business- type activities decreased by $ 509 million, or about 36.5 percent. At year- end,
net assets of governmental activities and business- type activities totaled $ 22.015 billion and $ 886
million, respectively.
 Component units reported net assets of $ 8.2 billion, an increase of $ 362.1 million from the
previous year. The largest component unit, the University of North Carolina System had net assets
of $ 5.79 billion at June 30, 2002, an increase of $ 178 million, or a 3.2% increase from fiscal year
2001.
Fund Level:
 As of the close of the fiscal year, the State’s General Fund reported a total fund balance deficit of
$ 349 million, with reserves of $ 227.8 million, and an unreserved fund balance of negative $ 576.3
million.
 The business- type activities funds reported net assets at year- end of $ 886 million during the year.
State Highway System:
 The State highway system includes roadway surfaces, bridges, signage, railings, markings and
other structures related to the State’s motor vehicle transportation system. The system includes
78,350 miles of roads, constituting the second largest highway system in the nation. The system
includes 17,250 bridges spanning 380 miles.
 For fiscal year 2002, the State reflected $ 11.5 billion ( net of accumulated depreciation) of highway
system infrastructure, an increase of $ 917 million ( net), or 8.6%.
Long- term Debt:
 The State’s general obligation debt payable increased during the fiscal year to $ 3.478 billion, an
increase of $ 439 million ( or by 14.5%), which represents the net difference between new issuances,
and payments, recognition of accretion, and the amortization of premiums on outstanding debt.
 During the year the State issued general obligation bonds in the amount of $ 605 million. More
detailed information regarding these activities and funds begins on page 85.
OVERVIEW OF THE FINANCIAL STATEMENTS
This discussion and analysis is an introduction to the State’s basic financial statements, which
comprise three components: 1) government- wide financial statements, 2) fund financial statements, and
3) notes to the financial statements. This report also contains additional required supplementary
information ( General Fund budgetary schedules, pension funding progress and contributions) and other
supplementary information ( combining financial statements) in addition to the basic financial
statements. These components are described below.
Government- wide Financial Statements
The Statement of Net Assets and the Statement of Activities are two financial statements that report
information about the State, as a whole, and about its activities that should help answer this question: Is
State of North Carolina 29
the State, as a whole, better off or worse off as a result of this year’s activities? These statements
include all non- fiduciary assets and liabilities using the accrual basis of accounting. The current year’s
revenues and expenses are taken into account regardless of when cash is received or paid. The
Statement of Net Assets ( page 46) presents all of the State’s assets and liabilities, with the difference
between the two reported as “ net assets”. Over time, increases and decreases in net assets measure
whether the State’s financial position is improving or deteriorating.
The Statement of Activities ( pages 48 and 49) presents information showing how the State’s net
assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the
underlying events giving rise to the change occur, regardless of the timing of related cash flows.
Therefore, revenues and expenses are reported in these statements for some items that will only result in
cash flows in future fiscal periods ( e. g. uncollected taxes and earned but unused vacation leave).
Both statements report three activities:
Governmental Activities – Most of the State’s basic services are reported under this category. Taxes
and intergovernmental revenues generally fund these services.
Business- type Activities – The State charges fees to customers to help it cover all or most of the cost of
certain services it provides. The State’s Unemployment Compensation Fund is the predominant
business- type activity.
Discretely Presented Component Units – Component units are legally separate organizations for which
the elected officials of the primary government are financially accountable. A description of the
component units and an address for obtaining their separately issued financial statements can be found
beginning on page 64. All component units are combined and displayed in a separate discrete column
in the government- wide financial statements to emphasize their legal separateness from the State. In
addition, condensed financial statements for major component units are presented in the notes to the
financial statements ( page 119).
This report includes two schedules ( pages 53 and 55) that reconcile the amounts reported on the
governmental fund financial statements ( modified accrual accounting) with governmental activities
( accrual accounting) on the appropriate government- wide statements. The following summarizes the
impact of transitioning from modified accrual to accrual accounting:
 Capital assets used in governmental activities are not reported on governmental fund statements.
 Certain tax revenues that are earned, but not available, are reported as governmental activities, but are reported as deferred
revenue on the governmental fund statements.
 Other long- term assets that are not available to pay for current period expenditures are deferred in governmental fund
statements, but not deferred on the government- wide statements.
 Internal service funds are reported as governmental activities, but reported as proprietary funds in the fund financial
statements.
 Certain pension trust funds have been funded in excess of their annual required contribution. These assets are recorded only
in the government- wide statements.
 Unless due and payable, long- term liabilities, such as capital lease obligations, compensated absences, litigation, bonds and
notes payable, and others only appear as liabilities in the government- wide statements.
 Capital outlay spending results in capital assets on the government- wide statements, but are reported as expenditures on the
governmental fund statements.
 Bond and note proceeds result in liabilities on the government- wide statements, but are recorded as other financing sources
on the governmental fund statements.
 Certain other outflows represent either increases or decreases in liabilities on the government- wide statements, but are
reported as expenditures on the governmental fund statements.
The Notes to the Financial Statements provide additional information that is essential to a full
understanding of the data provided in the government- wide and fund financial statements. The notes
can be found beginning on page 64 of this report.
30 State of North Carolina
Fund Financial Statements
The fund financial statements begin on page 52 and provide detailed information about the major
individual funds. A fund is a fiscal and accounting entity with a self- balancing set of accounts that the
State uses to keep track of specific sources of funding and spending for a particular purpose. In addition
to the major funds, page 137 begins the individual fund data for the non- major funds. The State's funds
are divided into three categories – governmental, proprietary, and fiduciary – and use different
accounting approaches.
Governmental funds -- Most of the State's basic services are reported in the governmental funds,
which focus on how money flows into and out of those funds and the balances left at year- end that
are available for future spending. The governmental fund financial statements provide a detailed
short- term view of the State's general government operations and the basic services it provides.
Governmental fund information helps determine whether there are more or fewer financial
resources that can be spent in the near future to finance the State's programs. These funds are
reported using modified accrual accounting, which measures cash and all other financial assets that
can readily be converted to cash. Governmental funds include the General Fund and special
revenue, capital project, and permanent funds.
Proprietary funds -- When the State charges customers for the services it provides, whether to
outside customers or to other agencies within the State, these services are generally reported in
proprietary funds. Proprietary funds ( enterprise and internal service) utilize accrual accounting; the
same method used by private sector businesses. Enterprise funds report activities that provide
supplies and services to the general public. The Unemployment Compensation Fund is our most
significant enterprise fund. Internal service funds report activities that provide supplies and
services for the State's other programs and activities - such as the State's State Property Fire
Insurance Fund, the Motor Fleet Management Fund, Centralized Computing Services Fund, and
Telecommunications Services Fund. Internal service funds are reported as governmental activities
on the government- wide statements.
Fiduciary funds -- The State acts as a trustee or fiduciary, for its employee pension plans. It is also
responsible for other assets that, because of a trust arrangement, can be used only for the trust
beneficiaries. The State's fiduciary activities are reported in separate Statements of Fiduciary Net
Assets and Changes in Fiduciary Net Assets beginning on page 60. These funds, which include
pension ( and other employee benefits), private- purpose, investment trust, and agency funds, are
reported using accrual accounting. The government- wide statements exclude fiduciary fund
activities and balances because these assets are restricted in purpose and cannot be used to support
the State’s own programs.
Additional Required Supplementary Information
Following the basic financial statements and note disclosures is additional Required Supplementary
Information that further explains and supports the information in the financial statements. The Required
Supplementary Information includes General Fund budgetary comparison schedules reconciling the
statutory and generally accepted account principles ( GAAP) fund balances at fiscal year- end, and
pension plan trend information related to funding progress and contributions.
Supplementary Information
Supplementary information includes the introductory section, and the combining financial
statements for non- major governmental, proprietary, and fiduciary funds. These funds are added
together, by fund type, and presented in single columns in the basic financial statements, but are not
reported individually, as with major funds, on the governmental fund financial statements.
State of North Carolina 31
FINANCIAL ANALYSIS OF THE GOVERNMENT AS A WHOLE
Statement of Net Assets. The State’s combined net assets increased $ 68.3 million, or .3% over the
course of this fiscal year’s operations. The net assets of the governmental activities increased $ 577.7
million or 2.7% and business- type activities had a decrease of $ 509.4 million or 36.5%.
Governmental Business- type Total Primary
Activities Activities Government
Current and other non-current
assets........................ $ 10,312 $ 1,142 $ 11,454
Capital assets, net..................... 22,340 42 22,382
Total assets.............................. 32,652 1,184 33,836
Long- term liabilities.................... 3,711 10 3,721
Other liabilities........................... 6,926 288 7,214
Total liabilities.......................... 10,637 298 10,935
Net assets:
Invested in capital assets,
net of related debt.................. 22,025 38 22,063
Restricted.................................. 1,605 798 2,403
Unrestricted............................... ( 1,615) 50 ( 1,565)
Total net assets........................ $ 22,015 $ 886 $ 22,901
Net Assets as of June 30, 2002
( In Millions)
The largest component ( 98%) of the State’s net assets reflects its investment in capital assets ( land,
buildings, machinery and equipment, State highway systems, general infrastructure, and other capital
assets), less any related debt outstanding that was needed to acquire or construct the assets. In
subsequent years, comparative data will provide the basis for more detailed analysis.
The State of North Carolina, like many other state and local governments, issues general obligation
debt and distributes the proceeds to local governments and component units. The proceeds are used to
expand university and community college capacity, fund capital maintenance, build local schools, and
to provide local access to clean water and natural gas utilities. Of the $ 3.48 billion of outstanding
general obligation debt at June 30, 2002, $ 3.17 billion of the outstanding debt is attributable to debt
issued as State aid to component units ( universities and community colleges) and local governments.
The balance sheets of component unit and local government recipients reflect ownership of the related
constructed capital assets without the burden of recording the debt obligation. The policy of selling
general obligation bonds and funneling the cash proceeds to non- primary government ( non- State)
entities has been in place for decades. Through this policy the State was able to promote improved
financial management, save bond issuance costs, and receive more attractive financing arrangements.
However, by issuing debt and sending the cash proceeds outside of the State, the State is left to reflect
significant liabilities on its statement of net assets ( balance sheet) which are reflected in the unrestricted
net asset component since there are no offsetting capital assets.
The government- wide statement of net assets for governmental activities reflects a negative $ 1.6
billion unrestricted net asset balance, with total net assets of $ 22.015 billion, and capital assets, net of
related debt of $ 22.025 billion. Total restricted governmental assets for fiscal year 2002 was $ 1.6
billion. From the governmental activities perspective, the fiscal year 2002 statement of net assets
indicates that the State is over- committed by $ 1.6 billion, primarily because of the distribution of debt
proceeds mentioned previously and other unfunded liabilities.
32 State of North Carolina
Statement of Activities. The following condensed financial information was derived from the
government- wide Statement of Activities and reflects how the State’s net assets changed during the
fiscal year:
Governmental Business- type Total Primary
Activities Activities Government
Revenues
Program revenues
Charges for services...................................... $ 1,313 $ 4 61 $ 1,774
Operating grants and contributions................. 8,787 439 9,226
Capital grants and contributions..................... 714 1 715
General revenues
Taxes
Individual income tax.................................. 7,235 — 7,235
Corporate income tax................................. 599 — 599
Sales and use tax....................................... 3,779 — 3,779
Gasoline tax................................................ 1,213 — 1,213
Franchise tax.............................................. 591 — 591
Highway use tax......................................... 555 — 555
Insurance tax.............................................. 348 — 348
Beverage tax.............................................. 201 — 201
Inheritance tax............................................ 107 — 107
Other taxes................................................. 279 — 279
Tobacco settlement........................................ 176 — 176
Unrestricted investment earnings................... 139 — 139
Miscellaneous................................................ 57 — 57
Total revenues.............................................. 26,093 901 26,994
Expenses
General government....................................... 874 — 874
Primary and secondary education.................. 6,803 — 6,803
Higher education............................................ 2,520 — 2,520
Health and human services............................ 10,377 — 10,377
Economic development.................................. 469 — 469
Environment and natural resources................ 627 — 627
Public safety, corrections and regulation........ 2,109 — 2,109
Transportation................................................ 1,531 — 1,531
Agriculture...................................................... 122 — 122
Interest on long- term debt.............................. 149 — 149
Unemployment compensation........................ — 1,337 1,337
Other business- type activities......................... — 25 25
Total expenses............................................. 25,581 1,362 26,943
Excess ( deficiency) before contributions
and transfers.............................................. 512 ( 461) 51
Contributions to permanent funds................... 2 — 2
Transfers........................................................ 48 ( 48) —
Increase ( decrease) in net assets................ 562 ( 509) 53
Net assets - beginning - restated.................... 21,453 1,395 22,848
Net assets - ending........................................ $ 22,015 $ 8 86 $ 22,901
Changes in Net Assets
For the Fiscal Year Ended June 30, 2002
( In Millions)
As a result of this year’s operations, the net assets of governmental activities increased by $ 562
million, or 2.6%. While this indicates that current year revenues were sufficient to cover current year
expenses, the growth in net assets was limited by the slowdown in the State’s economy and the
associated increased demand for government services.
State of North Carolina 33
The State highway system is estimated to have a public service life of 50 years based on the planned
maintenance schedule. Therefore, instead of charging the entire cost of additions to expense for the
State highway system in the year of construction, the State highway system is capitalized and
depreciated ( costs allocated) over the estimated life of the highway system. The expenses are allocated
over the periods of service to the public.
Business- type activities reflect a decrease in net assets of $ 509 million. The Unemployment
Compensation Fund is the predominant activity accounting for 89.5% of the total net assets of the
business type activities. Please refer to the discussion of major funds for more information on the
Unemployment Compensation Fund.
Governmental Activities:
The following chart depicts revenues of the governmental activities for the fiscal year:
Revenues - Governmental Activities
Fiscal Year Ending June 30, 2002
Charges for services
5%
Capital grants and
contributions
3%
Individual income and
corporate income taxes
30%
Gasoline and highway
use taxes
7%
Other taxes
6%
Miscellaneous
2%
Sales and use tax
14%
Operating grants and
contributions
33%
The State sales tax was increased by a half- cent from 4% to 4.5%, effective October 16, 2001, This
increase is scheduled to expire July 1, 2003. Effective July 1, 2002, the provisions for local government
tax reimbursements were repealed, and local governments now have the optional authority to impose an
additional half- cent sales tax. Effective for the tax years January 1, 2001 through December 31, 2003,
the highest individual income tax rate increased from 7.75% to 8.25%.
34 State of North Carolina
The following chart depicts expenses of the governmental activities for the fiscal year:
Expenses - Governmental Activities
Fiscal Year Ending June 30, 2002
—
$ 1,000
$ 2,000
$ 3,000
$ 4,000
$ 5,000
$ 6,000
$ 7,000
$ 8,000
$ 9,000
$ 10,000
$ 11,000
General
government
Primary and
secondary
education
Higher
education
Health and
human services
Economic
development
Environment
and natural
resources
Public safety,
corrections, and
regulation
Transportation Agriculture Interest on long-term
debt
Expenses
Program Revenues ( excluding Capital
Grants)
Millions
Business- type Activities
Net assets of the business- type activities decreased by $ 509.4 million during the fiscal year. The
primary factor contributing to these results included:
 Due to the increasing unemployment in the State ( due to the slowing economy and losses or lower
profits for business in North Carolina), the North Carolina Unemployment Compensation Funds’
payment of benefits increased from $ 678 million in fiscal year 2001 to $ 1.3 billion during fiscal
year 2002. However the negative impact on net assets was only $ 515 million, because of increases
in operating revenues during the year. Operating revenues increased by $ 412.8 million, or 104%.
State of North Carolina 35
General Fund
General Fund
Budgetary
Highlights
FINANCIAL ANALYSIS OF THE STATE’S INDIVIDUAL FUNDS
As the State completed the year, the governmental funds reflected fund balances of $ 3.08 billion.
This represented a decline in fund balances of $ 513.5 million in fiscal year 2002. The General Fund
decline of $ 319.5 million, and the Highway Trust Fund decline of $ 274.6 million represent the largest
portion of the overall decrease in governmental funds.
The General Fund is the chief operating fund of the State. At the end of fiscal year 2002, the State’s
General Fund reported a total fund balance deficit ( negative) of $ 349 million, with unreserved fund
balance of negative $ 576.3 million and reserved fund balance of $ 227.8 million. With the addition of
management designations as described in Note 8, the State’s General Fund was over- committed by $ 1.1
billion at June 30, 2002. Total fund balance diminished significantly during the fiscal year ($ 319.5
million), primarily the result of lower tax collections and the general slowing of the economy. The
public’s demand for government services tends to grow or remain strong during times of economic
difficulty, particularly in relation to the primary functions funded by General Fund operations
( education, health and human services). By the end of fiscal year 2002, General Fund revenues had
declined .21% from the prior year. On a modified accrual basis, individual income tax decreased by
$ 385.7 million, or 5%. Corporate income tax decreased by $ 164 million, or 23%. Franchise tax
revenues decreased by $ 154.4 million, or 20.7%. Sales and use tax increased by $ 336.8 million, or
9.8%, although the rate of increase was less than expected given the half- cent rate increase effective for
fiscal year 2002. Despite the decline in revenues, General Fund expenditures increased by 366.4
million, or 1.7%.
(. 6)
(. 5)
(. 4)
(. 3)
(. 2)
(. 1)
—
.1
.2
.3
.4
.5
.6
.7
.8
.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
FUND BALANCES OF THE GENERAL FUND ( GAAP Basis)
Unreserved
Reserved
Billions $
Original versus Final Budget. The General Fund is the State’s only major fund, as defined by GASB
Statement No. 34, to have a legally adopted annual budget. The original and final annual budgets
include budget appropriations supported by tax, non- tax, and other departmental receipts. The portion
of the original budget comprising departmental receipts is not intended to be a controlling point in the
effort to manage the State’s General Fund budget. The final budget includes amendments for
departmental receipts collected during the fiscal year. General Fund departmental receipts are typically
36 State of North Carolina
authorized for expenditure within the activity that generated the receipt. Historically, final estimated
receipts have varied significantly from the original estimate at the beginning of the fiscal year. State
agencies expend departmental receipts prior to spending State tax and non- tax supported appropriations.
If departmental receipts are higher than expected, appropriated dollars may go unspent and be re-appropriated
in a subsequent fiscal year.
Final Budget versus Actual Experience. The Schedule of Revenues, Expenditures and Changes in
Unreserved Fund Balance— Budget and Actual ( Budgetary Basis— Non- GAAP), General Fund is
intended to demonstrate legal compliance. In a typical year of General Fund budgetary operations,
federal and intra- governmental transactions will be significantly under- realized with an offsetting
under- expenditure in the primary and secondary education; health and human services; and public
safety, corrections, and regulation. When departmental receipts reflect under- realized revenues, there is
an offsetting under- expenditure of dollars against total budgeted appropriations.
For fiscal year 2002, the State experienced a shortfall in tax and non- tax receipts on the order of
$ 1.55 billion. Typical with the experience of other state governments, the slowing national and state
economy, resulted in a general decline in tax collections. Net of refunds to taxpayers, individual
income taxes fell short of estimates by $ 1.04 billion, corporate income taxes were less than expected by
$ 177 million, sales and use tax was $ 90.5 million less than expected, and franchise tax was $ 192.7
million under budget estimates. Inheritance tax collections fell short of estimates by $ 25.4 million.
Higher unemployment, lower individual business and corporate earnings, and a declining stock market,
resulting in lower capital gains, represented the common thread in the general tax revenue decline.
In the effort to meet the State constitutional mandate of balancing the General Fund budget,
reductions of $ 789.2 million were implemented, with the remainder of the budget funded by $ 437.7
million of non- General Fund dollars, and $ 239.3 million transferred from the Savings Reserve account.
Budget reductions affecting the major General Fund functions of our State government were as
follows: general government, 9.9%; primary and secondary education, 1.8%; community colleges,
7.1%; public universities, 8.6%; health and human services, 3.9%; economic development, 12.9%;
environment and natural resources, 18.9%, public safety, correction, and regulation, 4.5%; and
agriculture, 12.5%.
Investment income fell short of estimated budgetary receipts by $ 34.2 million as a result of lower
General Fund cash available for investment and lower investment rates of return.
Our State manages the budget through the Office of State Budget and Management ( OSBM). For
fiscal year 2002, OSBM executed the necessary cuts in the budget by withholding portions of quarterly
allotments and by giving agencies targeted reductions in spending. The final budget for tax and non- tax
revenues is never amended without a special session of the General Assembly. The appropriation of
increases in departmental receipts is authorized by the General Assembly through special provision in
the biennial budget bill.
Each state has flexibility in how it decides to establish and execute its budget. For example, North
Carolina nets certain distributions of State funds to local governments and other entities directly out of
taxes, where other states may appropriate similar activities. Effective for fiscal year 2003, certain local
government distributions previously considered continuing State appropriations from State revenue
collections, will be accounted for and reported as local government funds.
Refunds to individual income taxpayers of $ 1.373 billion represented 15.9% of total gross individual
income collections for fiscal year 2002. Refunds to corporate taxpayers of $ 230.8 million represented
23.2% of gross corporate income tax collections. Refunds of sales and use tax totaled $ 398.7 million in
fiscal year 2002, or 6.8% of gross collections.
For fiscal year 2002, the General Fund again closed the year with an extremely low unreserved fund
balance. For the fiscal years ended June 30, 2000, 2001, and 2002, the ending unreserved fund balance
was zero, zero, and $ 3.8 million, respectively. To gain a sense of perspective, since 1965 unreserved
State of North Carolina 37
fund balance in the General Fund averaged $ 200 million per year, or 3.9% of total appropriation
expenditures, equivalent to 10 business days disbursements of appropriation expenditures. In the
decade of the 1990’ s, unreserved fund balance averaged $ 293 million, or 3.1% of appropriation
expenditures, equivalent to eight business days worth of disbursements of appropriation expenditures.
47
51
76
32
53
33
39
33
71
28
8
10
19
21
19
26
12
8
5
17
22
16 17 17
6
8
—
4
11 11
7
10
8
11
6
— — —
—
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
General Fund Budgetary Basis —
Number of Days of Appropriation Expenditures in Unreserved
Fund Balance
at June 30
Days
Fiscal Year
North Carolina is required by its constitution to balance the General Fund on a budgetary basis. The
budgetary basis reserved fund balance totaled $ 390.1 million ( see table below). See the notes to
required supplemental information for a more detailed discussion of our State’s budgetary process. The
following schedule summarizes current year changes in the budgetary reserve accounts. Amounts are
expressed in thousands.
Transfers Transfers to
from General Fund
Balance General Fund Unreserved Balance
General Fund June 30, Unreserved Unbudgeted Fund Unbudgeted June 30,
Reserved Fund Balance 2001 Fund Balance Revenues Balance Expenditures 2002
Savings..............................$ 157,522 $ 90,000 $ 7 ,352 $ ( 239,342) $ ( 15,532)$ —
Retirees' health premium... 53,895 — — — ( 3,085) 50,810
N. C. Railroad acquisition... 31,582 — — — ( 9,501) 22,081
Disproportionate share....... 1,170 — — — ( 1,170) —
Disaster relief..................... 448,608 — 123,583 — ( 254,956) 317,235
Exec. Order # 3................... 178,472 2,911 — — ( 181,383) —
Exec. Order # 19................. — — 440,915 ( 324,915) ( 116,000) —
Total...................................$ 871,249 $ 92,911 $ 5 71,850 $ ( 564,257) $ ( 581,627) $ 390,126
Increases ( Decreases)
38 State of North Carolina
Highway
Fund
Highway
Trust Fund
General Fund Fiscal Year 2003 Budget. The General Fund State appropriations budget for fiscal year
2003 is $ 14.35 billion. The General Assembly took action on several revenue enhancements for fiscal
year 2003, totaling $ 866.1 million. The most significant action was the accelerated repeal of the local
government reimbursements paid to replace revenues lost by local governments as the result of actions
taken by the State ($ 333.4 million for fiscal year 2003). Local governments were granted the authority
to establish a one- half cent local option sales tax to replace the reimbursements. Additionally, the
annual transfer from the Highway Trust Fund was increased by $ 205 million for 2002- 2003, of which
$ 80 million is to be on a recurring basis, with $ 125 million established a one- time advance to be repaid
in the future. Additional non- recurring transfers of $ 38 million, from the Tobacco Trust Fund, and $ 40
million, from the Health and Wellness Trust Fund were approved by the General Assembly for fiscal
year 2003. The following table summarizes the fiscal year 2003 revenue enhancements. Amounts are
expressed in millions.
Amount
Local government reimbursements cancelled ............................................ $ 333.4
Highway Trust Fund Transfer — advance .................................................. 125.0
Business tax revisions ................................................................................ 90.0
Highway Trust Fund Transfer — recurring adjustment ............................... 80.0
Delay 2001 tax breaks ................................................................................ 51.7
Transfer from Health and Wellness Trust Fund — non- recurring ............... 40.0
Departmental fee increases ........................................................................ 39.3
Transfer from Tobacco Trust Fund — non- recurring .................................. 38.0
Department of Revenue — Project Collect Tax .......................................... 32.5
Special Fund / Trust Fund Transfers — non- recurring ............................... 20.4
Internal Revenue Code Conformity ............................................................ 15.8
Total ............................................................................................................
$ 866.1
The Highway Fund accounts for most of the activities of the North Carolina Department of
Transportation, including the construction and maintenance of the State primary, secondary, and urban
road systems. The principal revenues of the Highway Fund are gasoline ( motor fuels) taxes, motor
vehicle registration fees, driver's license fees, and federal aid.
While the effects of the slowing economy have had an impact on business travel, commercial
transportation and general consumer travel and tourism, the States highway fund taxes and fees have
still shown growth. Although total revenue of the Highway Fund declined by $ 29 million, or 1.3%,
gasoline tax increased by $ 20 million, or 2.3%, and fees, licenses, and fines increased by $ 18.8 million,
or 4.8%. The largest decrease came in the decline of accrued federal funds, $ 52 million, or 5.8%.
Expenditures for highway construction, maintenance, and administration grew by $ 103 million, or
4.5%.
The Highway Trust Fund was established to provide a dedicated funding mechanism to meet
highway construction needs for North Carolina. Taxes were increased for the specific purpose of
improving identified primary transportation corridors within the State and for the completion of urban
loops around seven major metropolitan areas. Additionally, this fund provides supplemental allocations
for secondary road construction and supplemental assistance to municipalities for local street projects.
The fund also makes transfers to the General Fund and the Highway Fund. The principal revenues of
the Highway Trust Fund are highway use taxes, motor fuels taxes, and various title and registration
fees.
Total revenues of the Highway Trust Fund declined by $ 10.8 million, or 1%. The decline in
investment and interest earnings of $ 26.7 million, as a result of lower cash balances to invest, had the
largest impact on the Highway Trust Fund. Gasoline tax increased by $ 8.3 million, or 2.9%, and
highway use tax grew by $ 9 million, or 1.7%. Transportation related expenditures of the Highway
Trust Fund grew by $ 63.5 million, or 11.9%.
State of North Carolina 39
Unemployment
Compensation
Fund
The Unemployment Compensation Fund accounts for the State’s unemployment insurance program,
which is part of a national system established to provide temporary benefit payments to eligible
unemployed workers. The unemployment benefits are financed primarily by State unemployment
insurance taxes, distributions of federal unemployment insurance taxes, and federal funding for the
unemployment benefits.
For fiscal year 2002, employer contributions grew by $ 52.5 million, or 13.8%. Federal Funds grew
by $ 361.3 million, or 2,465%. The drastic growth in revenues was driven by a slowing economy and an
increasing unemployment rate in North Carolina. Unemployment benefits paid in fiscal year 2002
totaled $ 1.3 billion, a 96.6% increase in payments over fiscal year 2001. Net assets of $ 793 million at
June 30, 2002 represented a decline of $ 516.2 million, or 39.4%.
CAPITAL ASSETS AND DEBT ADMINISTRATION
Capital Assets: At the end of the fiscal year 2002, the Statement of Net Assets reflected $ 22.382
billion, net of accumulated depreciation, in a broad range of capital assets ( see the table below).
Depreciation charges for this fiscal year totaled $ 515.7 million.
Governmental Business- type Total Primary
Activities Activities Government
Land............................................. $ 7,209 $ 3 $ 7,212
Buildings....................................... 1,330 15 1,345
Machinery and equipment............. 576 1 577
General infrastructure................... 88 7 95
State highway system................... 11,547 — 11,547
Other............................................ 135 — 135
Subtotal....................................... 20,885 26 20,911
Construction in progress............... 1,455 16 1,471
Total............................................. $ 22,340 $ 4 2 $ 22,382
Capital Assets, Net as of June 30, 2002
( In Millions)
The effort to manage the State’s General Fund budget shortfall resulted in the postponement of most
construction and maintenance activity. The State’s fiscal year 2001- 2002 capital outlay budget
included spending $ 32.9 million for new projects at various state agency buildings. More detailed
information about the State’s capital assets is presented in Note 4 to the financial statements, and in
Note 17.
For fiscal year 2002, the State reflected $ 11.5 billion ( net of accumulated depreciation) of highway
system infrastructure, an increase of $ 917 million ( net), or 8.6%. Depreciation expense for the highway
system was $ 315 million for fiscal year 2002. Based on the requirements of GASB Statement No. 34,
governments were only required to capitalize major infrastructure systems back to July 1, 1980. The
North Carolina Department of Transportation was able to recall and capitalize construction expenditure
information to include highway system construction costs since 1953.
40 State of North Carolina
Long- term Debt: The State authorizes, issues, and sells debt obligations. General obligation bonds,
issued by the State, are backed by the full faith and credit of the State. The State also issues revenue
dedicated bonded debt, whose payment for principal and interest comes solely out of funds that receive
legally restricted revenues. More detailed information regarding the State’s long- term obligations is
presented in Note 6 to the financial statements.
Governmental Business- type Total Primary
Activities Activities Government
General obligation bonds
( backed by the state)................... $ 3,478 $ — $ 3,478
Revenue bonds and notes
( backed by specific tax and
fee revenues).............................. — 10 10
Total............................................... $ 3,478 $ 1 0 $ 3,488
Outstanding Bonded Debt as of June 30, 2002
( In Millions)
During fiscal year 2002, the State issued general obligation debt totaling $ 605 million ($ 300 million
for capital maintenance and expanding the capacity of universities and community colleges; $ 215
million for clean water; $ 55 million for local school construction; and $ 35 million for natural gas).
The State is in the process ($ 300 million referred to above issued in fiscal year 2002) of fulfilling a
significant commitment to increase the capacity of the universities and community colleges and to
provide funding for renovations. In November 2000, the State’s voters approved $ 3.1 billion of
University and Community College general obligation bonds. The General Assembly has
predetermined the specific building projects to be funded by the bond proceeds. At June 30, 2002, there
was a remaining bond authorization of $ 2.55 billion of higher education bonds yet to be issued,
constituting 82.3% of the original $ 3.1 billion higher education bond authorization.
State of North Carolina 41
Bond Ratings
The State’s general obligation bonds are rated Aa1 by Moody’s, AAA by Standard & Poors, and
AAA by Fitch. During the fiscal year, Moody’s Investors Services downgraded the State of North
Carolina’s general obligation rating to Aa1, from Aaa. According to Moody’s, the primary reasons for
the downgrade were the State’s continued budget pressure, reliance on non- recurring revenues, and
weakened balance sheet. Also, Moody’s commented that the task of restoring structural budget balance
and rebuilding reserves faces political and economic obstacles.
Limitations on Debt
The limitations on the increase of State debt are contained in the State Constitution, Article 5,
Section 3. This section restricts the General Assembly from contracting debts secured by a pledge of
the faith and credit of the State, unless approved by a majority of the qualified voters of the State except
for:
1. To fund or refund a valid existing debt;
2. To supply an unforeseen deficiency in the revenue;
3. To borrow in anticipation of the collection of taxes due and payable within the current fiscal year to
an amount not exceeding 50 percent of such taxes;
4. To suppress riots or insurrections, or to repel invasions;
5. To meet emergencies immediately threatening the public health or safety, as conclusively
determined in writing by the Governor;
6. For any other lawful purposes, to the extent of two- thirds of the amount by which the State's
outstanding indebtedness shall have been reduced during the next preceding biennium.
No short- term borrowing occurred in fiscal year 2002.
ECONOMIC CONDITION AND OUTLOOK
The unemployment rate has dropped from 6.9% in April to 6.0% in October, and we have seen
improvement in the unemployment claims numbers. State sales tax receipts during the quarter ending
September 30 were up 1.7% over the same quarter last year and increased 2.3% during the second
calendar quarter. This compares to - 2.0% for the first quarter and - 3.5% for the final quarter of 2001.
Unit sales of cars and light trucks rose 2.9% in May and June this year.
Even with the recent improvements, the State is budgeting on the basis of a continued sluggish
recovery. As the state has diversified away from the traditional manufacturing industries ( textiles,
apparel, furniture, and tobacco) to electronics and other technology- oriented companies, we have
become more vulnerable to problems in the new sectors.
Key Economic Forecast Variables
(% Change Unless Noted)
Fiscal Year 2002
Actual
Fiscal Year 2003
Budgeted
North Carolina
Total Employment - 1.1% - 1.4%
Manufacturing Employment - 7.1% - 4.5%
Unemployment Rate 6.3% 7.4%
Personal Income 1.3% 1.8%
42 State of North Carolina
REQUESTS FOR INFORMATION
This financial report is designed to provide our citizens, taxpayers, customers, investors, and
creditors with a general overview of the State’s finances and to demonstrate the State’s accountability
for the money it receives. If you have any questions about this report or need additional financial
information, contact the North Carolina Office of the State Controller, Financial Reporting Section at
( 919) 981- 5454.
The State’s component units issue their own separately issued audited financial statements. These
statements may be obtained by directly contacting the component unit. A list of component units and
contact information is available in Note 1, beginning on page 64.
BASIC
FINANCIAL
STATEMENTS
44 State of North Carolina
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GOVERNMENT- WIDE
FINANCIAL
STATEMENTS
46 State of North Carolina
STATEMENT OF NET ASSETS
June 30, 2002 Exhibit A- 1
( Dollars in Thousands)
Primary Government
Governmental Business- type Component
Activities Activities Total Units
ASSETS
Cash and cash equivalents ( Note 3)............................... $ 3 ,628,804 $ 7 05,163 $ 4 ,333,967 $ 1 ,877,906
Investments ( Note 3)...................................................... 4 18,848 3 5,888 4 54,736 3 ,058,029
Securities lending collateral ( Note 3)............................... 3 ,674,464 2 00,009 3 ,874,473 —
Receivables, net.............................................................. 1 ,765,221 1 97,621 1 ,962,842 5 84,511
Due from fiduciary funds ( Note 7).................................... 5 ,681 — 5 ,681 —
Due from component units ( Note 7)................................. 9 ,391 — 9 ,391 584
Due from primary government ( Note 7)........................... — — — 1 55,677
Internal balances............................................................. 390 ( 390) — —
Inventories...................................................................... 1 34,715 416 1 35,131 6 5,880
Prepaid items.................................................................. 6 ,965 2 ,519 9 ,484 1 1,524
Advances to component units ( Note 7)............................ 4 7,081 — 4 7,081 —
Notes receivable............................................................. 5 22,684 — 5 22,684 2 ,445,722
Endowment investments................................................. 4 9,730 — 4 9,730 —
Deferred charges............................................................. — 129 129 1 7,605
Securities held in trust..................................................... 4 8,432 — 4 8,432 —
Pension assets ( Note 9).................................................. 37 — 37 —
Capital assets, net ( Note 4)............................................. 2 2,339,580 4 2,358 2 2,381,938 5 ,120,036
Total Assets ................................................................... 3 2,652,023 1 ,183,713 3 3,835,736 1 3,337,474
LIABILITIES
Accounts payable and accrued liabilities......................... 1 ,019,291 1 8,335 1 ,037,626 5 49,201
Medical claims payable................................................... 7 09,514 — 7 09,514 4 ,233
Unemployment benefits payable..................................... — 5 3,966 5 3,966 —
Tax refunds payable........................................................ 9 45,426 — 9 45,426 —
Obligations under securities lending................................ 3 ,674,464 2 00,009 3 ,874,473 —
Interest payable............................................................... 4 4,786 25 4 4,811 2 2,825
Due to fiduciary funds ( Note 7)........................................ 8 ,673 — 8 ,673 —
Due to component units ( Note 7)..................................... 1 55,677 — 1 55,677 584
Due to primary government ( Note 7)............................... — — — 1 8,218
Unearned revenue........................................................... 2 73,318 1 4,882 2 88,200 8 3,456
Advance from primary government ( Note 7).................... — — — 5 5,908
Obligations under reverse repurchase agreements......... — — — 3 4,995
Deposits payable............................................................. 176 141 317 2 2,040
Funds held for others...................................................... 9 4,393 — 9 4,393 3 98,684
Long- term liabilities ( Note 6):
Due within one year...................................................... 2 27,080 268 2 27,348 2 09,672
Due in more than one year........................................... 3 ,484,516 9 ,904 3 ,494,420 3 ,733,590
Total Liabilities................................................................ 1 0,637,314 2 97,530 1 0,934,844 5 ,133,406
NET ASSETS
Invested in capital assets, net of related debt.................. 2 2,025,039 3 8,267 2 2,063,306 3 ,851,666
Restricted for:
Nonexpendable:
Environment and natural resources........................... 4 3,846 — 4 3,846 —
Higher education....................................................... — — — 5 83,336
Expendable:
Primary and secondary education............................. 1 5,811 — 1 5,811 —
Higher education....................................................... 4 03,934 — 4 03,934 1 ,931,330
Health and human services....................................... 3 9,210 — 3 9,210 —
Economic development............................................. 5 3,389 — 5 3,389 2 31,901
Environment and natural resources........................... 4 4,125 — 4 4,125 —
Public safety, corrections, and regulation.................. 1 8,151 — 1 8,151 —
Transportation........................................................... 8 03,385 — 8 03,385 —
Unemployment compensation................................... — 7 93,118 7 93,118 —
Other purposes......................................................... 1 82,921 4 ,319 1 87,240 7 ,192
Unrestricted..................................................................... ( 1,615,102) 5 0,479 ( 1,564,623) 1 ,598,643
Total Net Assets.............................................................. $ 2 2,014,709 $ 8 86,183 $ 2 2,900,892 $ 8 ,204,068
The accompanying Notes to the Financial Statements are an integral part of this statement.
State of North Carolina 47
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48 State of North Carolina
STATEMENT OF ACTIVITIES
For the Fiscal Year Ended June 30, 2002
( Dollars in Thousands)
Operating Capital
Charges for Grants and Grants and Net ( Expense)
Functions/ Programs Expenses Services Contributions Contributions Revenue
Primary Government:
Governmental Activities:
General government................................................... $ 874,208 $ 184,982 $ 1 28,677 $ 2,544 $ ( 558,005)
Primary and secondary education.............................. 6,802,979 14,648 7 20,923 — ( 6,067,408)
Higher education........................................................ 2,519,703 789 1 5,281 — ( 2,503,633)
Health and human services........................................ 10,376,807 133,275 7 ,014,086 — ( 3,229,446)
Economic development.............................................. 469,102 21,828 2 44,531 — ( 202,743)
Environment and natural resources............................ 627,369 92,604 1 58,720 39,192 ( 336,853)
Public safety, corrections, and regulation................... 2,109,487 327,457 2 08,348 30,863 ( 1,542,819)
Transportation............................................................ 1,530,870 524,198 2 82,519 638,690 ( 85,463)
Agriculture.................................................................. 121,729 13,178 1 4,169 2,795 ( 91,587)
Interest on long- term debt.......................................... 148,595 — — — ( 148,595)
Total Governmental Activities............................. 25,580,849 1,312,959 8 ,787,254 714,084 ( 14,766,552)
Business- type Activities:
Unemployment Compensation................................... 1,336,718 433,364 4 34,439 — ( 468,915)
Other business- type activities..................................... 25,431 27,477 4 ,321 1,121 7,488
Total Business- type Activities............................. 1,362,149 460,841 4 38,760 1,121 ( 461,427)
Total Primary Government............................................. $ 26,942,998 $ 1,773,800 $ 9 ,226,014 $ 715,205 $ ( 15,227,979)
Component Units:
Golden LEAF Foundation........................................... $ 11,366 $ — $ ( 12,995)$ — $ ( 24,361)
University of North Carolina System........................... 5,132,174 3,045,092 3 91,424 35,484 ( 1,660,174)
Community Colleges.................................................. 1,155,149 183,081 3 45,531 54,361 ( 572,176)
N. C. Housing Finance Agency................................... 161,449 170,778 — — 9,329
N. C. State Education Assistance Authority................. 101,819 69,352 5 3,254 — 20,787
Other component units............................................... 197,548 39,958 1 0,774 11,044 ( 135,772)
Total Component Units................................................... $ 6,759,505 $ 3,508,261 $ 7 87,988 $ 100,889 $ ( 2,362,367)
The accompanying Notes to the Financial Statements are an integral part of this statement.
Program Revenues
State of North Carolina 49
STATEMENT OF ACTIVITIES ( continued)
For the Fiscal Year Ended June 30, 2002 Exhibit A- 2
( Dollars in Thousands)
25XX............. Total
Governmental Business- type Component
Activities Activities Total Units
Changes in Net Assets:
Net ( expense) revenue $ ( 14,766,552) $ ( 461,427) $ ( 15,227,979) $ ( 2,362,367)
General Revenues:
Taxes
Individual income tax.............................................. 7,234,431 — 7 ,234,431 —
Corporate income tax............................................. 599,382 — 5 99,382 —
Sales and use tax................................................... 3,778,873 — 3 ,778,873 —
Gasoline tax........................................................... 1,212,788 — 1 ,212,788 —
Franchise tax.......................................................... 590,992 — 5 90,992 —
Highway use tax..................................................... 555,320 — 5 55,320 —
Insurance tax.......................................................... 347,893 — 3 47,893 —
Beverage tax.......................................................... 200,593 — 2 00,593 —
Inheritance tax........................................................ 106,491 — 1 06,491 —
Other taxes............................................................. 278,740 — 2 78,740 —
Tobacco settlement.................................................... 175,836 — 1 75,836 —
Unrestricted investment earnings............................... 139,350 — 1 39,350 —
State operating aid..................................................... — — — 2,473,602
State capital aid.......................................................... — — — 217,306
Miscellaneous............................................................ 57,484 — 5 7,484 2,384
Contributions to permanent funds................................... 2,019 — 2 ,019 —
Contributions to term and permanent endowments........ — — — 31,148
Transfers........................................................................ 47,957 ( 47,957) — —
Total general revenues and transfers............................. 15,328,149 ( 47,957) 1 5,280,192 2,724,440
Change in net assets...................................................... 561,597 ( 509,384) 5 2,213 362,073
Net assets — July 1, as restated.................................... 21,453,112 1,395,567 2 2,848,679 7,841,995
Net assets — June 30.................................................... $ 22,014,709 $ 886,183 $ 2 2,900,892 $ 8,204,068
Primary Government
50 State of North Carolina
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FUND FINANCIAL
STATEMENTS
52 State of North Carolina
BALANCE SHEET
GOVERNMENTAL FUNDS
June 30, 2002 Exhibit B- 1
( Dollars in Thousands)
Highway Other Total
Highway Trust Governmental Governmental
General Fund Fund Funds Funds
ASSETS
Cash and cash equivalents ( Note 3)............................... $ 7 82,364 $ 4 73,860 $ 5 48,061 $ 1 ,761,147 $ 3 ,565,432
Investments ( Note 3)...................................................... 1 ,762 — — 3 96,053 3 97,815
Securities lending collateral ( Note 3)............................... 1 ,949,795 4 57,674 4 05,796 8 40,379 3 ,653,644
Receivables, net:
Taxes receivable.......................................................... 7 45,719 8 2,808 3 0,070 2 ,163 8 60,760
Accounts receivable..................................................... 1 05,399 2 ,795 3 29 2 8,921 1 37,444
Intergovernmental receivable....................................... 6 59,024 2 6,151 4 73 1 0,307 6 95,955
Interest receivable........................................................ 8 ,720 2 ,008 2 ,072 7 ,776 2 0,576
Contributions receivable............................................... 1 9,987 — — — 1 9,987
Other receivables......................................................... — 6 ,275 — 1 7 6 ,292
Due from fiduciary funds ( Note 7).................................... 5 ,457 — — 2 16 5 ,673
Due from other funds ( Note 7)......................................... 3 ,826 7 8,227 3 7 2 6,039 1 08,129
Due from component units ( Note 7)................................. 5 ,101 — — 2 ,659 7 ,760
Inventories...................................................................... 4 3,772 6 3,332 — 2 7,333 1 34,437
Prepaid items.................................................................. — — — 5 7 5 7
Advances to other funds ( Note 7).................................... — — 2 ,624 — 2 ,624
Advances to component units ( Note 7)............................ 2 2,081 — — 2 5,000 4 7,081
Notes receivable............................................................. 2 ,952 — — 5 19,732 5 22,684
Securities held in trust..................................................... 5 88 1 2,920 — 3 4,924 4 8,432
Endowment investments................................................. — — — 4 9,730 4 9,730
Total Assets.................................................................... $ 4 ,356,547 $ 1 ,206,050 $ 9 89,462 $ 3 ,732,453 $ 10,284,512
LIABILITIES AND FUND BALANCES
Liabilities:
Accounts payable and accrued liabilities:
Accounts payable......................................................... $ 6 3,739 $ 1 46,873 $ 3 7,950 $ 4 9,879 $ 2 98,441
Accrued payroll............................................................ 5 ,072 2 8,632 — 1 ,347 3 5,051
Intergovernmental payable........................................... 5 17,734 9 0,454 4 2,750 9 ,696 6 60,634
Claims payable............................................................. — — — 2 1,658 2 1,658
Medical claims payable................................................... 7 09,514 — — — 7 09,514
Tax refunds payable........................................................ 9 45,426 — — — 9 45,426
Obligations under securities lending................................ 1 ,949,795 4 57,674 4 05,796 8 40,379 3 ,653,644
Interest payable............................................................... 8 88 — — — 8 88
Due to fiduciary funds ( Note 7)........................................ 8 ,673 — — — 8 ,673
Due to other funds ( Note 7)............................................. 1 3,793 8 ,159 7 6,944 2 1,162 1 20,058
Due to component units ( Note 7)..................................... 1 0,791 2 18 — 1 44,067 1 55,076
Deferred revenue............................................................ 4 78,933 2 ,352 3 7 1 8,242 4 99,564
Advance from other funds ( Note 7).................................. — 2 ,624 — — 2 ,624
Deposits payable............................................................. 1 35 3 0 — 1 1 1 76
Funds held for others...................................................... 6 05 5 8,857 — 3 4,931 9 4,393
Total Liabilities................................................................ 4 ,705,098 7 95,873 5 63,477 1 ,141,372 7 ,205,820
Fund Balances:
Reserved ( Note 8)........................................................ 2 27,767 5 3,560 — 1 ,045,479 1 ,326,806
Unreserved, reported in:
General Fund............................................................ ( 576,318) — — — ( 576,318)
Special Revenue Funds............................................ — 3 56,617 4 25,985 1 ,471,625 2 ,254,227
Capital Projects Funds.............................................. — — — 7 3,751 7 3,751
Permanent Funds...................................................... — — — 2 26 2 26
Total Fund Balance......................................................... ( 348,551) 4 10,177 4 25,985 2 ,591,081 3 ,078,692
Total Liabilities and Fund Balances................................. $ 4 ,356,547 $ 1 ,206,050 $ 9 89,462 $ 3 ,732,453 $ 10,284,512
The accompanying Notes to the Financial Statements are an integral part of this statement.
State of North Carolina 53
RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET
TO THE STATEMENT OF NET ASSETS
June 30, 2002 Exhibit B- 1a
( Dollars in Thousands)
Total fund balances - governmental funds ( see Exhibit B- 1) $ 3,078,692
Amounts reported for governmental activities in the Statement of Net Assets are different
because:
- Capital assets used in governmental activities are not financial resources and,
therefore, are not reported in the funds ( see Note 4). These consist of:
Cost of capital assets ( excluding internal service funds)..................................................... $ 2 7,845,415
Less: Accumulated depreciation ( excluding internal service funds)..................................... ( 5,593,147)
Net capital assets........................................................................................................ 22,252,268
- Some assets, such as receivables, are not available soon enough to pay for current-period
expenditures and thus, are offset by deferred revenue in the governmental
funds. 228,786
- Pension assets, resulting from contributions in excess of the annual required
contribution are not financial resources and therefore are not reported in
the funds. ( See Note 9) 37
- Long- term debt instruments, such as bonds and notes payable, are not due and
payable in the current period and, therefore, the outstanding balances are not reported
in the funds ( see Note 6). Also, unamortized debt premiums are reported in the
Statement of Net Assets but are not reported in the funds. These balances consist of:
General obligation bonds payable....................................................................................... ( 3,467,325)
Unamortized debt premiums ( to be amortized as interest expense).................................... ( 13,709)
Less: Unamortized debt discounts ( to be amortized as interest expense)........................... 3,081
Notes payable..................................................................................................................... ( 11,753)
Capital leases payable........................................................................................................ ( 216)
Net long- term debt....................................................................................................... ( 3,489,922)
- Other liabilities not due and payable in the current period and, therefore, not reported
in the funds ( see Note 6) consist of:
Accrued interest payable..................................................................................................... ( 43,898)
Compensated absences ( excluding internal service funds)................................................. ( 207,563)
Obligations for workers compensation................................................................................. ( 7,145)
Arbitrage rebate payable..................................................................................................... ( 1,287)
Net pension obligation......................................................................................................... ( 3,775)
Total other liabilities..................................................................................................... ( 263,668)
- Internal service funds are used by management to charge the costs of certain
activities to individual funds. The assets and liabilities of the internal service funds
are included in governmental activities in the Statement of Net Assets ( see Exhibit B- 3). 208,516
Total net assets - governmental activities ( see Exhibit A- 1) $ 2 2,014,709
The accompanying Notes to the Financial Statements are an integral part of this statement.
54 State of North Carolina
STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES
GOVERNMENTAL FUNDS
For the Fiscal Year Ended June 30, 2002 Exhibit B- 2
( Dollars in Thousands)
Highway Other Total
Highway Trust Governmental Governmental
General Fund Fund Funds Funds
Revenues:
Taxes:
Individual income tax................................................... $ 7 ,219,794 $ — $ — $ 4 54 $ 7,220,248
Corporate income tax.................................................. 5 48,046 — — 5 4,330 602,376
Sales and use tax........................................................ 3 ,766,285 — — 1 2,900 3,779,185
Gasoline tax................................................................ — 8 89,919 2 96,964 2 6,613 1,213,496
Franchise tax............................................................... 5 92,259 — — — 592,259
Highway use tax.......................................................... — — 5 55,320 — 555,320
Insurance tax............................................................... 3 40,785 — — 7 ,108 347,893
Beverage tax............................................................... 2 00,593 — — — 200,593
Inheritance tax............................................................. 1 04,799 — — — 104,799
Other taxes.................................................................. 1 81,657 — — 9 6,970 278,627
Federal funds................................................................. 7 ,266,016 8 45,347 — 3 47,981 8,459,344
Local funds..................................................................... 6 82,310 7 ,269 — 1 2,497 702,076
Investment earnings....................................................... 1 88,310 2 2,866 1 0,183 1 13,723 335,082
Interest earnings on loans.............................................. 2 1 1 27 3 1,526 1 5,747 47,421
Sales and services......................................................... 6 1,259 7 ,060 — 1 26,229 194,548
Rental and lease of property.......................................... 7 ,102 1 3,839 1 ,790 1 ,628 24,359
Fees, licenses, and fines................................................ 2 37,236 4 08,198 9 0,968 1 28,510 864,912
Tobacco settlement........................................................ 1 75,836 — — — 175,836
Contributions, gifts, and grants....................................... 3 3,688 3 ,530 4 88 5 6,096 93,802
Funds escheated............................................................ — — — 9 0,181 90,181
Miscellaneous................................................................ 1 18,690 9 ,466 1 95 1 7,536 145,887
Total revenues......................................................... 2 1,724,686 2 ,207,621 9 87,434 1 ,108,503 26,028,244
Expenditures:
Current:
General government.................................................... 7 41,605 — — 6 7,793 809,398
Primary and secondary education............................... 6 ,495,702 — — 3 06,960 6,802,662
Higher education......................................................... 2 ,296,331 — — 2 23,293 2,519,624
Health and human services......................................... 1 0,333,124 — — 6 5,262 10,398,386
Economic development............................................... 1 88,617 — — 3 10,027 498,644
Environment and natural resources............................. 2 01,369 — — 3 73,502 574,871
Public safety, corrections, and regulation.................... 1 ,809,322 — — 2 60,844 2,070,166
Transportation............................................................. — 2 ,396,459 5 95,728 — 2,992,187
Agriculture................................................................... 7 3,176 — — 4 9,161 122,337
Capital outlay................................................................. — — — 1 26,011 126,011
Debt service:
Principal retirement..................................................... 1 63,723 — 1 6,675 — 180,398
Interest........................................................................ 1 38,148 — 9 ,432 — 147,580
Bond issuance costs................................................... 4 77 — — 2 57 734
Total expenditures.................................................... 2 2,441,594 2 ,396,459 6 21,835 1 ,783,110 27,242,998
Excess revenues over ( under) expenditures................... ( 716,908) ( 188,838) 3 65,599 ( 674,607) ( 1,214,754)
Other Financing Sources ( Uses):
Bonds issued................................................................. — — — 6 05,000 605,000
Other debt issued........................................................... 4 ,832 — — — 4,832
Premium on debt issued................................................. — — — 1 4,733 14,733
Capital leases................................................................. 2 16 — — — 216
Sale of capital assets..................................................... 5 ,950 5 47 1 ,003 5 ,070 12,570
Transfers in.................................................................... 6 16,871 4 00,843 — 4 60,594 1,478,308
Transfers out.................................................................. ( 230,499) ( 197,956) ( 641,170) ( 344,793) ( 1,414,418)
Total other financing sources ( uses)......................... 3 97,370 2 03,434 ( 640,167) 7 40,604 701,241
Net change in fund balances.......................................... ( 319,538) 1 4,596 ( 274,568) 6 5,997 ( 513,513)
Fund balances — July 1, as restated ( Note 19).............. ( 28,086) 3 96,054 7 00,553 2 ,526,882 3,595,403
Increase ( decrease) in reserve for related assets........... ( 927) ( 473) — ( 1,798) ( 3,198)
Fund balances — June 30.............................................. $ ( 348,551) $ 4 10,177 $ 4 25,985 $ 2 ,591,081 $ 3,078,692
The accompanying Notes to the Financial Statements are an integral part of this statement.
State of North Carolina 55
RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES,
AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS
TO THE STATEMENT OF ACTIVITIES
June 30, 2002 Exhibit B- 2a
( Dollars in Thousands)
Net change in fund balances - total governmental funds ( see Exhibit B- 2) $ ( 513,513)
Amounts reported for governmental activities in the Statement of Activities are different
because:
- Capital outlays are reported as expenditures in governmental funds. However, in the
Statement of Activities, the cost of capital assets is allocated over their estimated
useful lives as depreciation expense. In the current period, these amounts are:
Capital outlays ( including construction- in- progress) ............................................................ $ 1,979,924
Less: Depreciation expense ................................................................................................ ( 459,627)
Net capital outlay adjustment ....................................................................................... 1,520,297
- Proceeds from the sale of capital assets increase financial resources in the funds,
whereas in the Statement of Activities only the gain or loss on sale is reported. This
adjustment reduces the proceeds by the book value of the capital assets sold. ( 44,841)
- Long- term debt proceeds provide current financial resources to governmental funds,
while the repayment of the related debt principal consumes those financial resources.
These transactions, however, have no effect on net assets. Also, governmental funds
report the effect of premiums and similar items when debt is first issued, whereas these
amounts are deferred and amortized in the Statement of Activities. In the current period,
these amounts consist of:
Debt issued:
Bonds and similar debt issued ......................................................................................... ( 609,832)
Capital lease financings ................................................................................................... ( 216)
Premiums on debt issued ................................................................................................ ( 14,506)
Principal repayments:
Bonds, notes, and similar debt ........................................................................................ 180,398
Net debt adjustments ................................................................................................... ( 444,156)
- Some revenues in the Statement of Activities do not provide current financial
resources and, therefore, are deferred in the funds. Also, revenues related to prior
periods that became available during the current period are reported in the funds but
are eliminated in the Statement of Activities. This amount is the net adjustment. 35,620
- Some expenses reported in the Statement of Activities do not require the use of
current financial resources and, therefore, are not recognized in the funds. Also,
some payments related to prior periods are recognized in the funds but are eliminated
in the Statement of Activities. In the current period, the net adjustments consist of:
Accrued interest .................................................................................................................. ( 2,039)
Compensated absences ...................................................................................................... 5,181
Workers compensation ....................................................................................................... ( 77)
Arbitrage rebate .................................................................................................................. 8,261
Net pension obligation ......................................................................................................... ( 419)
Amortization of deferred amounts ....................................................................................... 797
Net expense accruals .................................................................................................. 11,704
- Inventories of governmental funds are recorded as expenditures when purchased
but in the Statement of Activities are recorded as expenses when consumed. ( 3,198)
- Internal service funds are used by management to charge the costs of certain
activities to individual funds. The net revenues of internal service funds are
included with governmental activities in the Statement of Activities ( see Exhibit B- 4). ( 316)
Change in net assets - governmental activities ( see Exhibit A- 2) $ 561,597
The accompanying Notes to the Financial Statements are an integral part of this statement.
56 State of North Carolina
STATEMENT OF NET ASSETS
PROPRIETARY FUNDS
June 30, 2002 Exhibit B- 3
( Dollars in Thousands)
Governmental
Activities —
Unemployment Other Total Internal
Compensation Enterprise Enterprise Service
Fund Funds Funds Funds
ASSETS
Current Assets:
Cash and cash equivalents ( Note 3)............................ $ 6 70,073 $ 3 2,069 $ 7 02,142 $ 6 3,372
Restricted cash and cash equivalents ( Note 3)............ — 724 724 —
Investments ( Note 3)................................................... — 2 7,700 2 7,700 2 1,033
Restricted investments ( Note 3)................................... — 25 25 —
Securities lending collateral ( Note 3)........................... 1 73,899 2 6,110 2 00,009 2 0,820
Receivables:
Accounts receivable, net........................................... 1 9,232 918 2 0,150 2 4,126
Intergovernmental receivables.................................. 1 ,616 — 1 ,616 —
Interest receivable.................................................... 855 73 928 59
Premiums receivable................................................ — 1 ,016 1 ,016 21
Contributions receivable, net.................................... 1 73,724 113 1 73,837 —
Due from fiduciary funds ( Note 7)................................ — — — 8
Due from other funds ( Note 7)..................................... 9 — 9 1 7,028
Due from component units ( Note 7)............................. — — — 1 ,631
Inventories................................................................... — 416 416 278
Prepaid items.............................................................. — 2 ,519 2 ,519 6 ,908
Total current assets............................................... 1 ,039,408 9 1,683 1 ,131,091 1 55,284
Noncurrent Assets:
Restricted/ designated cash and
cash equivalents ( Note 3)......................................... — 2 ,297 2 ,297 —
Investments ( Note 3)................................................... — 52 52 —
Restricted investments ( Note 3)................................... — 8 ,111 8 ,111 —
Receivables:
Accounts receivable, net........................................... — — — 1
Contributions receivable, net.................................... — 74 74 —
Deferred charges......................................................... — 129 129 —
Capital assets, net ( Note 4)......................................... — 4 2,358 4 2,358 8 7,312
Total noncurrent assets......................................... — 5 3,021 5 3,021 8 7,313
Total Assets........................................................... 1 ,039,408 1 44,704 1 ,184,112 2 42,597
LIABILITIES
Current Liabilities:
Accounts payable and accrued liabilities:
Accounts payable..................................................... 4 ,694 357 5 ,051 2 ,806
Accrued payroll......................................................... — 64 64 469
Intergovernmental payable....................................... 548 — 548 —
Claims payable......................................................... 2 ,680 9 ,992 1 2,672 232
Unemployment benefits payable.................................. 5 3,966 — 5 3,966 —
Obligations under securities lending............................ 1 73,899 2 6,110 2 00,009 2 0,820
Interest payable........................................................... — 25 25 —
Due to other funds ( Note 7)......................................... 393 6 399 4 ,709
Due to component units ( Note 7)................................. — — — 601
Deferred revenue......................................................... 1 0,110 4 ,772 1 4,882 2 ,540
Deposits payable......................................................... — 141 141 —
Bonds payable - current............................................... — 235 235 —
Accrued vacation leave - current.................................. — 33 33 201
Total current liabilities............................................ 2 46,290 4 1,735 2 88,025 3 2,378
Noncurrent Liabilities:
Bonds payable, net...................................................... — 9 ,570 9 ,570 —
Accrued vacation leave................................................ — 334 334 1 ,703
Total noncurrent liabilities...................................... — 9 ,904 9 ,904 1 ,703
Total Liabilities....................................................... 2 46,290 5 1,639 2 97,929 3 4,081
NET ASSETS
Invested in capital assets, net of related debt................. — 3 8,267 3 8,267 8 7,312
Restricted for:
Unemployment compensation..................................... 7 93,118 — 7 93,118 —
Other purposes............................................................ — 4 ,319 4 ,319 —
Unrestricted.................................................................... — 5 0,479 5 0,479 1 21,204
Total Net Assets.................................................... $ 7 93,118 $ 9 3,065 $ 8 86,183 $ 2 08,516
The accompanying Notes to the Financial Statements are an integral part of this statement.
Business- type Activities —
Enterprise Funds
State of North Carolina 57
STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS
PROPRIETARY FUNDS
For the Fiscal Year Ended June 30, 2002 Exhibit B- 4
( Dollars in Thousands)
Governmental
Activities —
Unemployment Other Total Internal
Compensation Enterprise Enterprise Service
Fund Funds Funds Funds
Operating Revenues:
Employer unemployment contributions............ $ 4 33,364 $ — $ 4 33,364 $ —
Federal funds.................................................. 3 75,908 — 3 75,908 —
Sales and services.......................................... — 1 ,221 1 ,221 2 15,043
Sales and services used as security
for bonds...................................................... —

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NORTH
CAROLINA
COMPREHENSIVE
ANNUAL
FINANCIAL
REPORT
FOR THE FISCAL YEAR
ENDED JUNE 30, 2002
MICHAEL F. EASLEY
GOVERNOR
ROBERT L. POWELL
STATE CONTROLLER
Prepared by Statewide Accounting Division
Office of the State Controller
http:// www. osc. state. nc. us
2 State of North Carolina
This report was prepared by the
Statewide Accounting Division of the North Carolina Office of the State Controller.
Don Waugh
ASSISTANT STATE CONTROLLER
dwaugh@ mail. osc. state. nc. us
Anne Godwin, CPA
Statewide Accounting Manager
agodwin@ mail. osc. state. nc. us
John Barfield, CPA
Financial Reporting Manager
jbarfiel@ mail. osc. state. nc. us
Amber Young
Central Compliance Manager
ayoung@ mail. osc. state. nc. us
Statewide Accounting Division Staff
Robert Alford, CPA Darlene Langston, CPA Shirley Trollinger
Ann Anderson Clayton Murphy, CPA Cynthia Vincent
John Eliadis Terri Noblin, CPA Helen Vozzo, CPA
Luke Harris Cindy Salgado, CPA Pam White, CPA
Martha Hunt, CPA Carmen Stanley, CPA
Cathy Johnson Melody Tart
Special appreciation is given to the chief fiscal officers and the dedicated accounting personnel throughout the State.
Their efforts to contribute accurate and timely financial data for their agencies, universities, community colleges, and
institutions made this report possible.
State of North Carolina 3
MICHAEL F. EASLEY
Governor of North Carolina
4 State of North Carolina
TABLE OF CONTENTS
Comprehensive Annual Financial Report
For the Fiscal Year Ended June 30, 2002
INTRODUCTORY SECTION
Letter of Transmittal.................................................................................................................... ..................................................................................................
Certificate of Achievement for Excellence in Financial Reporting...................................................................................................................... .........................
Organization of North Carolina State Government, including principal State officials.................................................................................................................
FINANCIAL SECTION
Report of Independent Auditor........................................................................................................................ ..............................................................................
Management's Discussion and Analysis....................................................................................................................... .................................................................
Basic Financial Statements
Government- wide Financial Statements
Statement of Net Assets — Exhibit A- 1.............................................................................................................................. ..........................................................
Statement of Activities — Exhibit A- 2.............................................................................................................................. ...........................................................
Fund Financial Statements
Balance Sheet— Governmental Funds — Exhibit B- 1.............................................................................................................................. .....................................
Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets — Exhibit B- 1a..................................................................................
Statement of Revenues, Expenditures, and Changes in Fund Balances— Governmental Funds — Exhibit B- 2............................................................................
Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances
of Governmental Funds to the Statement of Activities — Exhibit B- 2a............................................................................................................................. ...
Statement of Net Assets— Proprietary Funds — Exhibit B- 3.............................................................................................................................. .........................
Statement of Revenues, Expenses, and Changes in Fund Net Assets— Proprietary Funds — Exhibit B- 4....................................................................................
Statement of Cash Flows— Proprietary Funds — Exhibit B- 5.............................................................................................................................. ........................
Statement of Fiduciary Net Assets— Fiduciary Funds — Exhibit B- 6.............................................................................................................................. ............
Statement of Changes in Fiduciary Net Assets— Fiduciary Funds — Exhibit B- 7...................................................................................................................
Notes to the Financial Statements..................................................................................................................... .............................................................................
Required Supplementary Information
Schedules of Funding Progress— All Defined Benefit Pension Trust Funds.......................................................................................................................... ......
Schedule of Contributions from the Employers and Other Contributing Entities— All Defined Benefit Pension Trust Funds....................................................
Schedule of Revenues, Expenditures and Changes in Unreserved Fund Balances— Budget and Actual
—( Budgetary Basis— Non- GAAP) General Fund........................................................................................................................... ......................................
Notes to Required Supplementary Information— General Fund Budgetary Reporting..................................................................................................................
Combining Fund Statements and Schedules
Nonmajor Governmental Funds
Combining Balance Sheet— Nonmajor Governmental Funds — Exhibit C- 1.............................................................................................................................. .
Combining Statement of Revenues, Expenditures, and Changes in Fund Balances— Nonmajor Governmental Funds — Exhibit C- 2........................................
Combining Balance Sheet— Nonmajor Special Revenue Funds — Exhibit C- 3............................................................................................................................
Combining Statement of Revenues, Expenditures, and Changes in Fund Balances— Nonmajor Special Revenue Funds — Exhibit C- 4....................................
Combining Schedule of Revenues, Expenditures and Changes in Unreserved Fund Balances
— Budget and Actual ( Budgetary Basis— Non- GAAP) Nonmajor Special Revenue Funds — Exhibit C- 5......................................................................
Combining Balance Sheet— Nonmajor Capital Projects Funds — Exhibit C- 6.............................................................................................................................
Combining Statement of Revenues, Expenditures, and Changes in Fund Balances— Nonmajor Capital Projects Funds — Exhibit C- 7.....................................
Combining Balance Sheet— Nonmajor Permanent Funds — Exhibit C- 8.............................................................................................................................. ......
Combining Statement of Revenues, Expenditures, and Changes in Fund Balances— Nonmajor Permanent Funds — Exhibit C- 9.............................................
Proprietary Funds
Nonmajor Enterprise Funds
Combining Statement of Net Assets— Nonmajor Enterprise Funds — Exhibit D- 1......................................................................................................................
Combining Statement of Revenues, Expenses, and Changes in Fund Net Assets— Nonmajor Enterprise Funds — Exhibit D- 2.................................................
Combining Statement of Cash Flows— Nonmajor Enterprise Funds — Exhibit D- 3....................................................................................................................
Internal Service Funds
Combining Statement of Net Assets— Internal Service Funds — Exhibit E- 1..............................................................................................................................
Combining Statement of Revenues, Expenses, and Changes in Fund Net Assets— Internal Service Funds — Exhibit E- 2..........................................................
Combining Statement of Cash Flows— Internal Service Funds — Exhibit E- 3.............................................................................................................................
Fiduciary Funds
Combining Statement of Fiduciary Net Assets— Private Purpose Trust Funds — Exhibit F- 1.....................................................................................................
Combining Statement of Changes in Fiduciary Net Assets— Private Purpose Trust Funds — Exhibit F- 2.............................................................................
Combining Statement of Changes in Assets and Liabilities— Agency Funds — Exhibit F- 3........................................................................................................
State of North Carolina
Comprehensive Annual Financial Report
For the Fiscal Year Ended June 30, 2002
STATISTICAL SECTION
Revenues by Source and Expenditures by Function— All Governmental Fund Types ( GAAP Basis) — Table 1.........................................................................
Schedule of Revenues by Source— General Fund ( GAAP Basis) — Table 2.............................................................................................................................. .
General Obligation Bonds Debt Ratios — Table 3.............................................................................................................................. ..........................................
Revenue Bond Coverage — Table 4.............................................................................................................................. ................................................................
Schedule of General Obligation Bonds Payable — Table 5.............................................................................................................................. ............................
Statewide Assessed Property Values— Real Property, Tangible Personal Property and Public Service Companies — Table 6...................................................
Schedule of Bank and Savings and Loan Deposits of Financial Institutions Located in North Carolina — Table 7.....................................................................
Cash Receipts from Farming by Commodities — Table 8.............................................................................................................................. ..............................
Major Private Employers in North Carolina — Table 9.............................................................................................................................. ..................................
Schedule of Demographic Data — Table 10............................................................................................................................. ....................................................
Ten Largest Non- Agricultural Industries by Number of Employees — Table 11..........................................................................................................................
Required Supplementary Information— Claims Development Information — Public School Insurance Fund — Table 12.........................................................
Total Number of State Government Permanent Positions Funded in the State Budget by Agency — Table 13............................................................................
Schedule of Miscellaneous Statistics — Table 14............................................................................................................................. ............................................
6 State of North Carolina
THIS PAGE INTENTIONALLY LEFT BLANK.
INTRODUCTORY
SECTION
State of North Carolina
Office of the State Controller
Michael F. Easley, Governor Robert L. Powell, State Controller
MAILING ADDRESS
1410 Mail Service Center
Raleigh, NC 27699- 1410
Telephone: ( 919) 981- 5454
Fax Number: ( 919) 981- 5567
State Courier: 56- 50- 10
LOCATION
3512 Bush Street
Raleigh, NC
Website: www. osc. state. nc. us
An Equal Opportunity/ Affirmative Action/ Americans With Disabilities Employer
The Honorable Michael F. Easley, Governor
Members of the North Carolina General Assembly
Citizens of North Carolina
It is our pleasure to furnish you with the 2002 Comprehensive Annual Financial Report ( CAFR) of the State of North
Carolina in compliance with G. S. 143B- 426.39. This report has been prepared by the Office of the State Controller.
Responsibility for both the accuracy of the data and the completeness and fairness of the presentation, including all disclosures,
rests with the State government and this office. To the best of our knowledge and belief, this financial report is complete and
reliable in all material respects. We believe all disclosures necessary to enable you to gain an understanding of the State's
financial activities have been included.
Although the State budgets and manages its financial affairs on the cash basis of accounting, G. S. 143- 20.1 requires the
Office of the State Controller to prepare a comprehensive annual financial report ( CAFR) in accordance with generally
accepted accounting principles in the United States of America ( GAAP). Except for exhibits and notes clearly labeled
otherwise, this CAFR has been prepared in accordance with GAAP.
For the convenience of users we have divided this comprehensive annual financial report into three major sections,
described as follows:
The introductory section includes this transmittal letter and the State's organization chart, including a listing of principal
State officials.
The financial section includes management discussion and analysis, the basic financial statements ( government- wide
financial statements, fund financial statements, and notes), other required supplementary information, the combining and
individual fund financial statements, and schedules.
The statistical section includes selected financial, non- financial and demographic information, much of which is
presented on a ten- year basis, as well as required supplementary information.
Management of the government is responsible for establishing and maintaining an internal control structure designed to
ensure that the assets of the State are protected from loss, theft or misuse and to ensure that adequate accounting data are
compiled to allow for the preparation of financial statements in conformity with generally accepted accounting principles. The
internal control structure is designed to provide reasonable, but not absolute, assurance that these objectives are met. The
concept of reasonable assurance recognizes that: ( 1) the cost of a control should not exceed the benefits likely to be derived,
and ( 2) the valuation of costs and benefits requires estimates and judgments by management.
GASB Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and
Local Governments, requires that management provide a narrative introduction, overview and analysis to accompany the Basic
Financial Statements in the form of management discussion and analysis ( MD& A). This letter of transmittal is intended to
complement MD& A and should be read in conjunction with it. The MD& A can be found immediately following the
Independent Auditor’s Report.
State of North Carolina 9
Profile of the Government
The State of North Carolina entity as reported in the CAFR includes all fund types of the
departments, agencies, boards, commissions and authorities governed and legally controlled by
the State's executive, legislative and judicial branches. In addition, the reporting entity includes
legally separate component units for which the State is financially accountable. The component
units are discretely presented in the government- wide financial statements. The State's discretely
presented major component units are the University of North Carolina System; the State's
community colleges; Golden LEAF, North Carolina Housing Finance Agency, and North
Carolina State Education Assistance Authority. The criteria for inclusion in the reporting entity
and its presentation are defined by the Governmental Accounting Standards Board ( GASB) in
its GASB Codification Section 2100. These criteria are described in Note 1 of the
accompanying financial statements.
The State and its component units provide a broad range of services to its citizens,
including public education; higher education; health and human services; economic
development; environment and natural resources; public safety, corrections, and regulation;
transportation; agriculture; and general government services. The costs of these services are
reflected in detail and in summary in this report.
In addition to internal controls discussed previously, the State maintains budgetary controls.
The objective of these budgetary controls is to ensure compliance with legal provisions
embodied in the annual appropriated budget approved by the General Assembly. Activities of
the General Fund and most departmental special revenue funds are included in the annual
appropriated budget. The State Highway Fund and the Highway Trust Fund, the State's major
special revenue funds, are primarily budgeted on a multi- year basis. Capital projects are funded
and planned in accordance with the time it will take to complete the project. The level of
budgetary control ( that is, the level at which expenditures cannot legally exceed the appropriated
amount) is exercised at both the departmental and university level by way of quarterly allotments,
with allotment control exercised by the State Controller, and on the program line- item levels
requiring certain approvals by the Director of the Budget. Legislative authorization of
departmental expenditures appears in the State Appropriation Bill. This " Certified Budget" is
the legal expenditure authority; however, the Office of State Budget and Management ( OSBM)
may approve executive changes to the legal budget. This results in the " Final Budget" presented
in the required supplementary information.
Economic Condition and Outlook
The primary factors affecting the nation’s economy during the period ending June 30, 2002
were the terrorist attacks of September 11 and the continuing impact of the stock market crash.
During the summer of 2001, economists were noting that the economy seemed to be
recovering from the slowdown that had begun the past winter. This seemingly optimistic
viewpoint was supported by a number of indicators including the monthly survey of purchasing
managers, falling energy prices, federal tax cuts robust housing refinancing activity, and stable
consumer spending.
The optimism vanished on September 11. The first impact of the terrorist actions was a
sharp drop in consumer spending during the latter part of September as consumer confidence
dropped by 20 percentage points. When retail activity slowed, manufacturers discovered they
had excess inventory and began paring production. This led to fewer hours for workers and
eventually forced layoffs. The loss of income led workers to cut back on spending even more
and the downward spiral typical of a recession had begun.
State Reporting
Entity and
Its Services
Budgetary
Control
National
Situation
10 State of North Carolina
Compounding the problem was the prolonged pullback in capital spending. The trigger for
this decision by executives was the fact that the 2000- 2002 economy was characterized by the
steepest decline in corporate profits in over five decades. This factor, coupled with the crash of
technology and telecommunications stocks beginning in March 2000, led companies to reduce
spending on new facilities and equipment, even in the face of very favorable interest rates.
The recovery from the events of September 11 has been the most sluggish in decades. The
first stage of the turnaround, beginning last November, was fueled by a combination of additional
interest rate cuts, rapid money supply growth, and aggressive fiscal policy ( tax cuts, federal
disaster assistance). In addition, the level of business inventories fell by a record amount during
the fourth quarter of 2001, setting the stage for a ramping up of production.
Around March of this year, the recovery began to experience what some economists are
calling a “ soft spot.” This loss of momentum was similar to the temporary slowdown
experienced in late 1991, just six months after the beginning of the recovery from the Gulf War.
In fact, the 1991- 93 recovery stalled out three times before a more permanent acceleration took
place in mid- 1993.
At the end of the 2001- 02 fiscal year economic indicators were starting to show signs of
improvement. Examples included unemployment claims, retail activity, money supply growth,
and record refinancing activity due to the lowest mortgage rates in 40 years. This led many
economists to forecast 3- 4% real ( inflation- adjusted) economic growth for the second half of the
calendar year.
There is reason for concern about the fragility of the recovery even though positive signs
are popping up every day. First is the continued weakness in equity prices, especially for
NASDAQ stocks ( down 76% from their 2000 peak). This has devastated the value of 401( k)
balances and other sources of savings, causing a drop in consumer confidence. This pattern is
the converse of the 1995- 99 experience, when skyrocketing stock prices provided fuel for a
consumer spending binge through the “ wealth effect.”
In addition, investors and consumers have been shaken by the accounting fraud and the
potential military action against Iraq. A final concern is the mountain of debt taken on by
consumers and businesses during the favorable impact of the free- spending 1990s. To date, the
debt overhang for individuals has not been a problem due to the impact of low mortgage rates on
the demand for housing and incentive- driven demand for vehicles. Once refinancing slows and
the bubble in housing prices breaks, the underpinning for the unusually stable spending levels
during this recession may evaporate.
The final issue has to do with the prolonged decline in business investment. Many
manufacturers continue to experience excess capacity and add new facilities until demand
improves. In addition, they are reluctant to rehire laid off workers, preferring to extend the
workweek of the employees and bring in temporary workers. Until a major turnaround in stock
prices occurs or we get additional federal monetary or fiscal stimulus, we think that the national
recovery will continue to be sluggish. The good news is that the combination of depressed
inventories and historically low interest rates should prevent the economy from going back into a
recession.
State of North Carolina 11
One of the primary characteristics of the 2001 recession was the impact on the
manufacturing sector. This is important to North Carolina because 18% of nonagricultural
employment is in manufacturing in our state versus 12% nationally. A more important measure
might be the share of gross state product tied to manufacturing: around 23% in North Carolina
versus 17% for the United States.
The decline in manufacturing jobs did not begin with the 2001 recession. Data compiled
by the Employment Security Commission show that manufacturing experienced a fairly rapid
recovery from the 1990- 91 recession, with job growth of 2.6% in 1993. In fact, the “ boom and
bust” nature of manufacturing is one reason why the state’s economy grew 33% faster than the
national experience following the 1981- 82 recession and 45% faster following the Gulf War
downturn. In fact, North Carolina was the fifth fastest growing state during the 1992- 94 period.
Manufacturing employment began a steady decline in mid- 1995 as the national economy
experienced a mild slowdown following the Fed rate hikes in 1994. The rate of decline began to
accelerate in February 2001 and peaked at an 8.5% year- over- year rate in late 2001. Particularly
hard hit were the textile and apparel sectors, dropping over 15% annually by the spring of 2001.
There are some signs that the state’s economy has begun to improve. For one thing, the
unemployment rate has dropped from 6.9% in April to 6.0% in October and we have seen
improvement in the unemployment claims numbers. State sales tax receipts during the quarter
ending September 30 were up 1.7% over the same quarter last year and increased 2.3% during
the second calendar quarter. This compares to - 2.0% for the first quarter and - 3.5% for the final
quarter of 2001. Unit sales of cars and light trucks rose 2.9% in May and June this year. Finally,
real estate conveyance tax collections, levied on a “ percent of value” basis, continue to benefit
from favorable mortgage rates.
Even with the recent improvements, the State is budgeting on the basis of a continued
sluggish recovery. This would be very different from the explosive growth after the last two
recessions. One reason is the continued weakness of tech stock prices. As the state has
diversified away from the traditional manufacturing industries ( textiles, apparel, furniture, and
tobacco) to electronics and other technology- oriented companies, we have become more
vulnerable to problems in the new sectors.
A classic example is the experience of the Catawba Valley region ( Hickory). During the
late- 1990s, this area had an unemployment rate as low as 1.5% due to the explosive growth of
fiber optic manufacturing. Now, the unemployment rate in this county is 9.4%, one of the
highest rates in the state. We are concerned that it may take some time for the nation’s
telecommunications companies to work down excess inventory.
State
Prospects
12 State of North Carolina
In addition, it is not clear how areas affected by the displacement of workers in traditional
industries will recover. The prevailing view of many local officials is that not only are the jobs
lost in recent years the textile, apparel, and furniture sectors gone forever but the shift away from
U. S. production is spreading to other types of manufacturing operations.
Key Economic Forecast Variables
(% Change Unless Noted)
Fiscal Year 2001- 2002
Actual
Fiscal Year 2002- 2003
Budgeted
National
Real Economic Growth* 1.9% 1.4%
Real Consumer Spending* 3.0% 2.1%
Industrial Production - 4.0% 0.6%
Nominal Personal Income 3.3% 1.9%
Consumer Price Index 1.8% 2.3%
Short- Term Interest Rates 2.3% 1.8%
Pre- Tax Profits ( Calendar Yr.) - 17.9% - 7.5%
North Carolina
Total Employment - 1.1% - 1.4%
Manufacturing Employment - 7.1% - 4.5%
Unemployment Rate 6.3% 7.4%
Personal Income 1.3% 1.8%
* Adjusted for inflation
— Economic analysis prepared by David Crotts
Fiscal Research Division
North Carolina General Assembly
November 15, 2002
State of North Carolina 13
Issues and Observations
During fiscal year 2002, the Governor, the General Assembly, and the departments and
agencies of State government worked to address key issues facing State government and the
citizens of North Carolina.
While this report presents the financial condition of the State on a GAAP basis, it is
important to note some of the budget and program realities that contributed to our current
condition. With the adoption of the General Fund budget for fiscal year ended June 30, 2003,
North Carolina will have experienced its third straight year in which spending needs exceeded
recurring revenues. This problem has been increased by the economic downturn experienced
nationally and in North Carolina. The increase in spending needs is attributed to enrollment
growth in the public schools and higher education institutions along with continued increased
costs in the health and human services areas such as Medicaid and children services. The result
is that North Carolina has spent more money than it has realized in the General Fund during the
last four consecutive years.
In order to meet the constitutional requirement of a balanced budget for the General Fund,
the Governor has exercised his constitutional powers through the enactment of Executive Orders
to control spending and to identify resources to meet spending requirements. Among these
resources are the Highway Trust Fund, the Tobacco Trust Fund, agency special funds, and
reductions to employer contributions to some of the State retirement systems. State agencies and
institutions have been operating under Executive Orders since February 2001. The current
Executive Order allows spending at an average of 96.5% of the authorized General Fund budget
for fiscal year 2003.
Because of the budget shortfalls, the need to use State reserves, and the inability to
replenish reserves, the result has been an overall reduction in the net worth of the General Fund
( GAAP basis) component of the State budget. In the last three years, the unreserved balance has
gradually declined to its current level of negative $ 575 million for the fiscal year ended June 30,
2002. The Savings Reserve Account balance was used to balance the budget in fiscal year 2001,
and the General Assembly authorized new funds to replenish that reserve in fiscal year 2002. But
the Savings Reserve Account balance again was required to manage the budget shortfall for
fiscal year 2002. As of June 30, 2002, the Savings Reserve had a zero balance.
For fiscal year 2003 through December 11, $ 215.6 million has been set aside in the
Governor’s Executive Order Reserve and is available to manage any potential budget shortfall
that may occur. It is important to note, however, that some of these funds will be needed for the
continued recovery of eastern North Carolina from the aftermath of Hurricane Floyd. This
Reserve coupled with spending restrictions and zero economic revenue growth are the tools the
Governor is using to manage the 2003 budget.
In August 2002, Moody’s investors service advised North Carolina of a downgrade in its
credit from AAA to Aa1 representing the first time since 1960 that North Carolina had less than
AAA credit. Moody’s advised that the North Carolina budget had been under too much financial
strain for too long and that the North Carolina economy was not sufficient to retain our rating at
this time While the rating service praised the strength of executive powers available to insure a
balanced budget, they cited lack of structural balance, a weakened GAAP balance sheet, and the
continued reliance on non- recurring resources as major factors in the downgrade. They made
specific note of the reversal of GAAP balances that have reversed from positives to negatives in
a relatively short period of time.
Challenges continue to exist for State government financial and program managers as we
move further into this decade. The Governor will propose his 2003- 05 budget to the 2003
Session of the General Assembly and many of the fiscal issues will continue into this legislative
Fiscal
Accountability
and Reporting
14 State of North Carolina
session. More discussion of the financial issues of North Carolina can be found in the
Management’s Discussion and Analysis ( MD& A) section of this document.
Financial Information
The MD& A provides an overview of the State’s financial activities addressing both
governmental and business- type activities reported in the government- wide financial statements.
In addition, MD& A focuses on the State’s major funds: the General Fund, the Highway Fund and
the Highway Trust Fund.
Pensions. The State contributes to the Teachers' and State Employees' Retirement System, the
Consolidated Judicial Retirement System, the Legislative Retirement System, the Firemen's and
Rescue Squad Workers' Pension Fund, the Supplemental Retirement Income Plan of North
Carolina, and the North Carolina National Guard Pension Fund. The Local Governmental
Employees' Retirement System is administered by the State but the State is not a participant.
The retirement systems experienced a total return from investments of - 4.34% for the one-year
period, a return of 0.62% for the three- year period and a return of 5.97% for the five- year
period, ended June 30, 2002. These returns are among the better results for public pension plans
in the United States, and reflect the conservative asset allocation and attention to investment
quality that have guided the plans investment policy. Recent reports indicate that the North
Carolina Retirement System investment performance ( all pension plans under management) was
among the top 12% of all public plans for the last 12 months, and among the top 9% for the past
five years for the period ended September 30, 2002.
The Teachers' and State Employees' Retirement System ( TSERS), the largest of the pension
trust funds, continued to be fully funded, based on the December 31, 2001 actuarial valuation.
Specifically, the TSERS was funded at 111.6%, with the actuarial value of assets of $ 42.1 billion
exceeding the actuarial accrued liability of $ 37.7 billion by $ 4.4 billion at December 31, 2001.
Employer contributions to the TSERS decreased by $ 110.3 million, or 35.7% from the prior
fiscal year. Investment balances declined by $ 2.8 billion, or 6.3% from the prior fiscal year, with
a net investment income loss of $ 1.9 billion representing a decline in net earnings of $ 811
million, or 75.3% from the prior year. The TSERS experienced a $ 130.8 million increase in
benefit payments to retirees, an increase of 7.7% from fiscal year 2001.
Employee and Retiree Health Insurance. The State Health Plan ( reported as a component unit
for fiscal year 2001) provides comprehensive major medical care for employees and retirees of
the State and its participating component units, and it allows for optional coverage of employee
and retirees' dependents. This care is also extended to employees and retirees of the Local
Education Agencies ( LEAs), which are not part of the State's reporting entity. Coverage is self-funded
by contributions to the State Health Plan ( the Plan), a proprietary component unit of the
State. Contributions for employee and retiree coverage are made by the State, its participating
component units, and LEAs. Contributions for dependent coverage are made by employees and
retirees. Coverage is also extended to certain individuals as an other postemployment benefit.
The Plan pays most expenses that are medically necessary and eligible for coverage based on
usual, customary and reasonable allowances. Claims are subject to specified annual deductible
and copayment requirements. The Plan disallows claims in excess of a lifetime maximum of $ 5
million.
As of July 1, 2001, an estimated $ 240 to $ 300 million of cost savings for the State Health
Plan were implemented in the form of increased insurance premiums, reduction of benefits to
employees and dependents, and in the form of cuts in payments to providers. The State Health
Plan pays 100% of the health insurance premium for employees and retirees, but employees and
Pension
and Other
Post-employment
Benefits
State of North Carolina 15
retirees must pay for optional family or dependent coverage. Employer contributions account for
80% of State Health Plan funding. Effective October 1, 2001, the insurance premium for
dependent coverage rose by 30%. Net assets increased from a negative $ 159.7 million at June
30, 2001 to a negative $ 99.4 million at June 30, 2002, an increase ( deficit decrease) of $ 60.3
million, or 37.7%, with premium revenues for fiscal year 2002 rising to $ 1.27 billion, an increase
of $ 331.1 million, or 35.3%. For fiscal year 2002, claims and benefits totaled $ 1.18 billion, an
increase of $ 54.5 million, or 4.8%.
Historically, the State's health benefits package has been a key component of an overall
compensation package enabling the State to hire and retain quality personnel.
The State’s general obligation bonds are rated Aa1 by Moody’s, AAA by Standard &
Poors, and AAA by Fitch. During the fiscal year, Moody’s Investors Services downgraded the
State of North Carolina’s general obligation rating to Aa1, from AAA. According to Moody’s,
the primary reasons for the downgrade were the State’s continued budget pressure, reliance on
non- recurring revenues, and weakened balance sheet. Also, Moody’s commented that the task of
restoring structural budget balance and rebuilding reserves faces political and economic
obstacles.
The favorable ratings have enabled the State to sell its bonds at interest rates considerably
below the Bond Buyer's Index, thereby providing substantial savings to North Carolina
taxpayers. Approximately 25 percent of all AAA ratings for state and local governments
nationwide are located in North Carolina.
It is the policy of the State that all agencies, institutions, departments, bureaus, boards,
commissions and officers of the State shall devise techniques and procedures for the receipt,
deposit and disbursement of monies coming into their control and custody which are designed to
maximize interest- bearing investment of cash, and to minimize idle and nonproductive cash
balances. The State Controller, with the advice and assistance of the State Treasurer, the State
Budget Officer, and the State Auditor, develops, implements, and amends the Statewide Cash
Management Policy. All cash deposited with the State Treasurer by State entities is managed in
pooled investment accounts to maximize interest earnings. During fiscal year 2002,
uncommitted State funds were invested in short- term and medium- term U. S. Government notes
and bonds, as well as other deposits, which had a composite average yield of 5.38%.
The State maintains self- insurance programs for employee health; general liability; medical
malpractice; workers’ compensation; and automobile, fire and other property losses. The State
limits its risk for general liability; medical malpractice; and automobile fire and other property
losses by purchasing private insurance for losses in excess of deductibles. See Note 12 of the
Notes to the Financial Statements for a full description of the State's risk management program.
Other Information
In compliance with State statute, an annual financial audit of the State reporting entity is
completed each year by the North Carolina Office of the State Auditor. The Auditor's
examination was conducted in accordance with auditing standards generally accepted in the
United States of America and the standards applicable to financial audits contained in
Government Auditing Standards, issued by the Comptroller General of the United States, and his
opinion has been included in this report. In addition, the State coordinates the Single Audit effort
of all federal funds through the State Auditor.
Debt
Administration
Cash
Management
Risk
Management
Independent
Audit
16 State of North Carolina
The Government Finance Officers Association of the United States and Canada ( GFOA)
awarded a Certificate of Achievement for Excellence in Financial Reporting to the State of North
Carolina for its comprehensive annual financial report ( CAFR) for the fiscal year ended June 30,
2001. The Certificate of Achievement is a prestigious national award recognizing conformance
with the highest standards for preparation of state and local government financial reports.
In order to be awarded a Certificate of Achievement, a government unit must publish an
easily readable and efficiently organized comprehensive annual financial report, whose contents
conform to program standards. The CAFR must satisfy both generally accepted accounting
principles and applicable legal requirements.
A Certificate of Achievement is valid for a period of one year only. We believe our current
report continues to conform to the Certificate of Achievement program requirements, and we are
submitting it to GFOA.
In conclusion, we believe this report provides useful data to all parties using it in evaluating
the financial activity of the State of North Carolina. We in the Office of the State Controller
express our appreciation to the financial officers throughout State government and to the Office
of the State Auditor for their dedicated efforts in assisting us in the preparation of this report.
Any questions concerning the information contained in this Comprehensive Annual Financial
Report should be directed to the Office of the State Controller at ( 919) 981- 5454.
Respectfully submitted,
Robert L. Powell
State Controller
December 12, 2002
Certificate of
Achievement
Acknowledgments
State of North Carolina 17
THIS PAGE INTENTIONALLY LEFT BLANK.
CERTIFICATE OF ACHIEVEMENT
20 State of North Carolina
ORGANIZATION OF NORTH CAROLINA STATE GOVERNMENT
INCLUDING PRINCIPAL STATE OFFICIALS
EXECUTIVE BRANCH
Council of State
Governor
Michael F. Easley
Lieutenant Governor
Beverly E. Perdue
Secretary of State
Elaine F. Marshall
State Auditor
Ralph Campbell, Jr.
State Treasurer
Richard H. Moore
Superintendent of
Public Instruction
Dr. Michael E. Ward
Attorney General
Roy A. Cooper, III
Commissioner of
Agriculture
Meg Scott Phipps
Commissioner of
Labor
Cherie K. Berry
Commissioner of
Insurance
James E. Long
Cabinet Secretaries — Appointed by the Governor
Administration
Gywnn T. Swinson
Correction
Theodis Beck
Crime Control and
Public Safety
Bryan E. Beatty
Cultural Resources
Lisbeth C. Evans
Commerce
James T. Fain
Environment
& Natural Resources
William G. Ross, Jr.
Health and Human
Services
Carmen Hooker Odom
Revenue
E. Norris Tolson
Transportation
W. Lyndo Tippett
Appointed by Governor, confirmed by Legislature
Office of the
State Controller
Robert L. Powell
State Controller
State Board
of Education
Phillip J. Kirk, Jr.
Chairman
H. Martin Lancaster
President
Molly C. Broad
President
Appointed by University
Board of Governors
Appointed by State Board
of Community Colleges
Juvenile Justice and
Delinquency Prevention
George L. Sweat
State of North Carolina 21
LEGISLATIVE BRANCH JUDICIAL BRANCH
Component Units
State of North Carolina Web Page
http:// www. ncgov. com
North Carolina
Supreme Court
Chief Justice
I. Beverly Lake, Jr.
Associate Justices
G. K. Butterfield, Jr.
Robert H. Edmunds, Jr.
Robert F. Orr
Mark D. Martin
Sarah Parker
George L. Wainwright, Jr.
Administrative
Office of the Courts
John Kennedy
Director
University of North
Carolina System
Community Colleges State Education
Assistance Authority
General Assembly
Senate
House of
Representatives
Speaker
James B. Black
Speaker Pro Tempore
Joe Hackney
Majority Leader
Philip A. Baddour
Minority Leader
N. Leo Daughtry
President
Lieutenant Governor
President Pro Tempore
Marc Basnight
Deputy Pres. Pro Tempore
Frank W. Ballance, Jr.
Majority Leader
Tony Rand
Minority Leader
Patrick J. Ballentine
Golden LEAF NC Housing Finance
Agency
Other Component
Units
22 State of North Carolina
THIS PAGE INTENTIONALLY LEFT BLANK.
FINANCIAL
SECTION
24 State of North Carolina
State of North Carolina 25
26 State of North Carolina
THIS PAGE INTENTIONALLY LEFT BLANK.
MANAGEMENT’S
DISCUSSION AND
ANALYSIS
28 State of North Carolina
Highlights
MANAGEMENT'S DISCUSSION AND ANALYSIS ( MD& A)
The following is a discussion and analysis of the State of North Carolina’s ( the State’s) financial
performance, providing an overview of the activities for the fiscal year ended June 30, 2002. Please
read it in conjunction with the transmittal letter at the front of this report and with the State's financial
statements, which follow this section. Because fiscal year 2002 represents the first year in which the
State implemented the provisions of Governmental Accounting Standards Board ( GASB) Statement
No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local
Governments, this discussion and analysis provides few comparisons with the previous year. Future
reports are required to include extensive comparisons.
Government- wide:
 The State’s total net assets remained virtually unchanged as a result of this year’s operations.
While net assets of governmental activities increased by $ 562 million, or nearly 2.6 percent, net
assets of business- type activities decreased by $ 509 million, or about 36.5 percent. At year- end,
net assets of governmental activities and business- type activities totaled $ 22.015 billion and $ 886
million, respectively.
 Component units reported net assets of $ 8.2 billion, an increase of $ 362.1 million from the
previous year. The largest component unit, the University of North Carolina System had net assets
of $ 5.79 billion at June 30, 2002, an increase of $ 178 million, or a 3.2% increase from fiscal year
2001.
Fund Level:
 As of the close of the fiscal year, the State’s General Fund reported a total fund balance deficit of
$ 349 million, with reserves of $ 227.8 million, and an unreserved fund balance of negative $ 576.3
million.
 The business- type activities funds reported net assets at year- end of $ 886 million during the year.
State Highway System:
 The State highway system includes roadway surfaces, bridges, signage, railings, markings and
other structures related to the State’s motor vehicle transportation system. The system includes
78,350 miles of roads, constituting the second largest highway system in the nation. The system
includes 17,250 bridges spanning 380 miles.
 For fiscal year 2002, the State reflected $ 11.5 billion ( net of accumulated depreciation) of highway
system infrastructure, an increase of $ 917 million ( net), or 8.6%.
Long- term Debt:
 The State’s general obligation debt payable increased during the fiscal year to $ 3.478 billion, an
increase of $ 439 million ( or by 14.5%), which represents the net difference between new issuances,
and payments, recognition of accretion, and the amortization of premiums on outstanding debt.
 During the year the State issued general obligation bonds in the amount of $ 605 million. More
detailed information regarding these activities and funds begins on page 85.
OVERVIEW OF THE FINANCIAL STATEMENTS
This discussion and analysis is an introduction to the State’s basic financial statements, which
comprise three components: 1) government- wide financial statements, 2) fund financial statements, and
3) notes to the financial statements. This report also contains additional required supplementary
information ( General Fund budgetary schedules, pension funding progress and contributions) and other
supplementary information ( combining financial statements) in addition to the basic financial
statements. These components are described below.
Government- wide Financial Statements
The Statement of Net Assets and the Statement of Activities are two financial statements that report
information about the State, as a whole, and about its activities that should help answer this question: Is
State of North Carolina 29
the State, as a whole, better off or worse off as a result of this year’s activities? These statements
include all non- fiduciary assets and liabilities using the accrual basis of accounting. The current year’s
revenues and expenses are taken into account regardless of when cash is received or paid. The
Statement of Net Assets ( page 46) presents all of the State’s assets and liabilities, with the difference
between the two reported as “ net assets”. Over time, increases and decreases in net assets measure
whether the State’s financial position is improving or deteriorating.
The Statement of Activities ( pages 48 and 49) presents information showing how the State’s net
assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the
underlying events giving rise to the change occur, regardless of the timing of related cash flows.
Therefore, revenues and expenses are reported in these statements for some items that will only result in
cash flows in future fiscal periods ( e. g. uncollected taxes and earned but unused vacation leave).
Both statements report three activities:
Governmental Activities – Most of the State’s basic services are reported under this category. Taxes
and intergovernmental revenues generally fund these services.
Business- type Activities – The State charges fees to customers to help it cover all or most of the cost of
certain services it provides. The State’s Unemployment Compensation Fund is the predominant
business- type activity.
Discretely Presented Component Units – Component units are legally separate organizations for which
the elected officials of the primary government are financially accountable. A description of the
component units and an address for obtaining their separately issued financial statements can be found
beginning on page 64. All component units are combined and displayed in a separate discrete column
in the government- wide financial statements to emphasize their legal separateness from the State. In
addition, condensed financial statements for major component units are presented in the notes to the
financial statements ( page 119).
This report includes two schedules ( pages 53 and 55) that reconcile the amounts reported on the
governmental fund financial statements ( modified accrual accounting) with governmental activities
( accrual accounting) on the appropriate government- wide statements. The following summarizes the
impact of transitioning from modified accrual to accrual accounting:
 Capital assets used in governmental activities are not reported on governmental fund statements.
 Certain tax revenues that are earned, but not available, are reported as governmental activities, but are reported as deferred
revenue on the governmental fund statements.
 Other long- term assets that are not available to pay for current period expenditures are deferred in governmental fund
statements, but not deferred on the government- wide statements.
 Internal service funds are reported as governmental activities, but reported as proprietary funds in the fund financial
statements.
 Certain pension trust funds have been funded in excess of their annual required contribution. These assets are recorded only
in the government- wide statements.
 Unless due and payable, long- term liabilities, such as capital lease obligations, compensated absences, litigation, bonds and
notes payable, and others only appear as liabilities in the government- wide statements.
 Capital outlay spending results in capital assets on the government- wide statements, but are reported as expenditures on the
governmental fund statements.
 Bond and note proceeds result in liabilities on the government- wide statements, but are recorded as other financing sources
on the governmental fund statements.
 Certain other outflows represent either increases or decreases in liabilities on the government- wide statements, but are
reported as expenditures on the governmental fund statements.
The Notes to the Financial Statements provide additional information that is essential to a full
understanding of the data provided in the government- wide and fund financial statements. The notes
can be found beginning on page 64 of this report.
30 State of North Carolina
Fund Financial Statements
The fund financial statements begin on page 52 and provide detailed information about the major
individual funds. A fund is a fiscal and accounting entity with a self- balancing set of accounts that the
State uses to keep track of specific sources of funding and spending for a particular purpose. In addition
to the major funds, page 137 begins the individual fund data for the non- major funds. The State's funds
are divided into three categories – governmental, proprietary, and fiduciary – and use different
accounting approaches.
Governmental funds -- Most of the State's basic services are reported in the governmental funds,
which focus on how money flows into and out of those funds and the balances left at year- end that
are available for future spending. The governmental fund financial statements provide a detailed
short- term view of the State's general government operations and the basic services it provides.
Governmental fund information helps determine whether there are more or fewer financial
resources that can be spent in the near future to finance the State's programs. These funds are
reported using modified accrual accounting, which measures cash and all other financial assets that
can readily be converted to cash. Governmental funds include the General Fund and special
revenue, capital project, and permanent funds.
Proprietary funds -- When the State charges customers for the services it provides, whether to
outside customers or to other agencies within the State, these services are generally reported in
proprietary funds. Proprietary funds ( enterprise and internal service) utilize accrual accounting; the
same method used by private sector businesses. Enterprise funds report activities that provide
supplies and services to the general public. The Unemployment Compensation Fund is our most
significant enterprise fund. Internal service funds report activities that provide supplies and
services for the State's other programs and activities - such as the State's State Property Fire
Insurance Fund, the Motor Fleet Management Fund, Centralized Computing Services Fund, and
Telecommunications Services Fund. Internal service funds are reported as governmental activities
on the government- wide statements.
Fiduciary funds -- The State acts as a trustee or fiduciary, for its employee pension plans. It is also
responsible for other assets that, because of a trust arrangement, can be used only for the trust
beneficiaries. The State's fiduciary activities are reported in separate Statements of Fiduciary Net
Assets and Changes in Fiduciary Net Assets beginning on page 60. These funds, which include
pension ( and other employee benefits), private- purpose, investment trust, and agency funds, are
reported using accrual accounting. The government- wide statements exclude fiduciary fund
activities and balances because these assets are restricted in purpose and cannot be used to support
the State’s own programs.
Additional Required Supplementary Information
Following the basic financial statements and note disclosures is additional Required Supplementary
Information that further explains and supports the information in the financial statements. The Required
Supplementary Information includes General Fund budgetary comparison schedules reconciling the
statutory and generally accepted account principles ( GAAP) fund balances at fiscal year- end, and
pension plan trend information related to funding progress and contributions.
Supplementary Information
Supplementary information includes the introductory section, and the combining financial
statements for non- major governmental, proprietary, and fiduciary funds. These funds are added
together, by fund type, and presented in single columns in the basic financial statements, but are not
reported individually, as with major funds, on the governmental fund financial statements.
State of North Carolina 31
FINANCIAL ANALYSIS OF THE GOVERNMENT AS A WHOLE
Statement of Net Assets. The State’s combined net assets increased $ 68.3 million, or .3% over the
course of this fiscal year’s operations. The net assets of the governmental activities increased $ 577.7
million or 2.7% and business- type activities had a decrease of $ 509.4 million or 36.5%.
Governmental Business- type Total Primary
Activities Activities Government
Current and other non-current
assets........................ $ 10,312 $ 1,142 $ 11,454
Capital assets, net..................... 22,340 42 22,382
Total assets.............................. 32,652 1,184 33,836
Long- term liabilities.................... 3,711 10 3,721
Other liabilities........................... 6,926 288 7,214
Total liabilities.......................... 10,637 298 10,935
Net assets:
Invested in capital assets,
net of related debt.................. 22,025 38 22,063
Restricted.................................. 1,605 798 2,403
Unrestricted............................... ( 1,615) 50 ( 1,565)
Total net assets........................ $ 22,015 $ 886 $ 22,901
Net Assets as of June 30, 2002
( In Millions)
The largest component ( 98%) of the State’s net assets reflects its investment in capital assets ( land,
buildings, machinery and equipment, State highway systems, general infrastructure, and other capital
assets), less any related debt outstanding that was needed to acquire or construct the assets. In
subsequent years, comparative data will provide the basis for more detailed analysis.
The State of North Carolina, like many other state and local governments, issues general obligation
debt and distributes the proceeds to local governments and component units. The proceeds are used to
expand university and community college capacity, fund capital maintenance, build local schools, and
to provide local access to clean water and natural gas utilities. Of the $ 3.48 billion of outstanding
general obligation debt at June 30, 2002, $ 3.17 billion of the outstanding debt is attributable to debt
issued as State aid to component units ( universities and community colleges) and local governments.
The balance sheets of component unit and local government recipients reflect ownership of the related
constructed capital assets without the burden of recording the debt obligation. The policy of selling
general obligation bonds and funneling the cash proceeds to non- primary government ( non- State)
entities has been in place for decades. Through this policy the State was able to promote improved
financial management, save bond issuance costs, and receive more attractive financing arrangements.
However, by issuing debt and sending the cash proceeds outside of the State, the State is left to reflect
significant liabilities on its statement of net assets ( balance sheet) which are reflected in the unrestricted
net asset component since there are no offsetting capital assets.
The government- wide statement of net assets for governmental activities reflects a negative $ 1.6
billion unrestricted net asset balance, with total net assets of $ 22.015 billion, and capital assets, net of
related debt of $ 22.025 billion. Total restricted governmental assets for fiscal year 2002 was $ 1.6
billion. From the governmental activities perspective, the fiscal year 2002 statement of net assets
indicates that the State is over- committed by $ 1.6 billion, primarily because of the distribution of debt
proceeds mentioned previously and other unfunded liabilities.
32 State of North Carolina
Statement of Activities. The following condensed financial information was derived from the
government- wide Statement of Activities and reflects how the State’s net assets changed during the
fiscal year:
Governmental Business- type Total Primary
Activities Activities Government
Revenues
Program revenues
Charges for services...................................... $ 1,313 $ 4 61 $ 1,774
Operating grants and contributions................. 8,787 439 9,226
Capital grants and contributions..................... 714 1 715
General revenues
Taxes
Individual income tax.................................. 7,235 — 7,235
Corporate income tax................................. 599 — 599
Sales and use tax....................................... 3,779 — 3,779
Gasoline tax................................................ 1,213 — 1,213
Franchise tax.............................................. 591 — 591
Highway use tax......................................... 555 — 555
Insurance tax.............................................. 348 — 348
Beverage tax.............................................. 201 — 201
Inheritance tax............................................ 107 — 107
Other taxes................................................. 279 — 279
Tobacco settlement........................................ 176 — 176
Unrestricted investment earnings................... 139 — 139
Miscellaneous................................................ 57 — 57
Total revenues.............................................. 26,093 901 26,994
Expenses
General government....................................... 874 — 874
Primary and secondary education.................. 6,803 — 6,803
Higher education............................................ 2,520 — 2,520
Health and human services............................ 10,377 — 10,377
Economic development.................................. 469 — 469
Environment and natural resources................ 627 — 627
Public safety, corrections and regulation........ 2,109 — 2,109
Transportation................................................ 1,531 — 1,531
Agriculture...................................................... 122 — 122
Interest on long- term debt.............................. 149 — 149
Unemployment compensation........................ — 1,337 1,337
Other business- type activities......................... — 25 25
Total expenses............................................. 25,581 1,362 26,943
Excess ( deficiency) before contributions
and transfers.............................................. 512 ( 461) 51
Contributions to permanent funds................... 2 — 2
Transfers........................................................ 48 ( 48) —
Increase ( decrease) in net assets................ 562 ( 509) 53
Net assets - beginning - restated.................... 21,453 1,395 22,848
Net assets - ending........................................ $ 22,015 $ 8 86 $ 22,901
Changes in Net Assets
For the Fiscal Year Ended June 30, 2002
( In Millions)
As a result of this year’s operations, the net assets of governmental activities increased by $ 562
million, or 2.6%. While this indicates that current year revenues were sufficient to cover current year
expenses, the growth in net assets was limited by the slowdown in the State’s economy and the
associated increased demand for government services.
State of North Carolina 33
The State highway system is estimated to have a public service life of 50 years based on the planned
maintenance schedule. Therefore, instead of charging the entire cost of additions to expense for the
State highway system in the year of construction, the State highway system is capitalized and
depreciated ( costs allocated) over the estimated life of the highway system. The expenses are allocated
over the periods of service to the public.
Business- type activities reflect a decrease in net assets of $ 509 million. The Unemployment
Compensation Fund is the predominant activity accounting for 89.5% of the total net assets of the
business type activities. Please refer to the discussion of major funds for more information on the
Unemployment Compensation Fund.
Governmental Activities:
The following chart depicts revenues of the governmental activities for the fiscal year:
Revenues - Governmental Activities
Fiscal Year Ending June 30, 2002
Charges for services
5%
Capital grants and
contributions
3%
Individual income and
corporate income taxes
30%
Gasoline and highway
use taxes
7%
Other taxes
6%
Miscellaneous
2%
Sales and use tax
14%
Operating grants and
contributions
33%
The State sales tax was increased by a half- cent from 4% to 4.5%, effective October 16, 2001, This
increase is scheduled to expire July 1, 2003. Effective July 1, 2002, the provisions for local government
tax reimbursements were repealed, and local governments now have the optional authority to impose an
additional half- cent sales tax. Effective for the tax years January 1, 2001 through December 31, 2003,
the highest individual income tax rate increased from 7.75% to 8.25%.
34 State of North Carolina
The following chart depicts expenses of the governmental activities for the fiscal year:
Expenses - Governmental Activities
Fiscal Year Ending June 30, 2002
—
$ 1,000
$ 2,000
$ 3,000
$ 4,000
$ 5,000
$ 6,000
$ 7,000
$ 8,000
$ 9,000
$ 10,000
$ 11,000
General
government
Primary and
secondary
education
Higher
education
Health and
human services
Economic
development
Environment
and natural
resources
Public safety,
corrections, and
regulation
Transportation Agriculture Interest on long-term
debt
Expenses
Program Revenues ( excluding Capital
Grants)
Millions
Business- type Activities
Net assets of the business- type activities decreased by $ 509.4 million during the fiscal year. The
primary factor contributing to these results included:
 Due to the increasing unemployment in the State ( due to the slowing economy and losses or lower
profits for business in North Carolina), the North Carolina Unemployment Compensation Funds’
payment of benefits increased from $ 678 million in fiscal year 2001 to $ 1.3 billion during fiscal
year 2002. However the negative impact on net assets was only $ 515 million, because of increases
in operating revenues during the year. Operating revenues increased by $ 412.8 million, or 104%.
State of North Carolina 35
General Fund
General Fund
Budgetary
Highlights
FINANCIAL ANALYSIS OF THE STATE’S INDIVIDUAL FUNDS
As the State completed the year, the governmental funds reflected fund balances of $ 3.08 billion.
This represented a decline in fund balances of $ 513.5 million in fiscal year 2002. The General Fund
decline of $ 319.5 million, and the Highway Trust Fund decline of $ 274.6 million represent the largest
portion of the overall decrease in governmental funds.
The General Fund is the chief operating fund of the State. At the end of fiscal year 2002, the State’s
General Fund reported a total fund balance deficit ( negative) of $ 349 million, with unreserved fund
balance of negative $ 576.3 million and reserved fund balance of $ 227.8 million. With the addition of
management designations as described in Note 8, the State’s General Fund was over- committed by $ 1.1
billion at June 30, 2002. Total fund balance diminished significantly during the fiscal year ($ 319.5
million), primarily the result of lower tax collections and the general slowing of the economy. The
public’s demand for government services tends to grow or remain strong during times of economic
difficulty, particularly in relation to the primary functions funded by General Fund operations
( education, health and human services). By the end of fiscal year 2002, General Fund revenues had
declined .21% from the prior year. On a modified accrual basis, individual income tax decreased by
$ 385.7 million, or 5%. Corporate income tax decreased by $ 164 million, or 23%. Franchise tax
revenues decreased by $ 154.4 million, or 20.7%. Sales and use tax increased by $ 336.8 million, or
9.8%, although the rate of increase was less than expected given the half- cent rate increase effective for
fiscal year 2002. Despite the decline in revenues, General Fund expenditures increased by 366.4
million, or 1.7%.
(. 6)
(. 5)
(. 4)
(. 3)
(. 2)
(. 1)
—
.1
.2
.3
.4
.5
.6
.7
.8
.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
FUND BALANCES OF THE GENERAL FUND ( GAAP Basis)
Unreserved
Reserved
Billions $
Original versus Final Budget. The General Fund is the State’s only major fund, as defined by GASB
Statement No. 34, to have a legally adopted annual budget. The original and final annual budgets
include budget appropriations supported by tax, non- tax, and other departmental receipts. The portion
of the original budget comprising departmental receipts is not intended to be a controlling point in the
effort to manage the State’s General Fund budget. The final budget includes amendments for
departmental receipts collected during the fiscal year. General Fund departmental receipts are typically
36 State of North Carolina
authorized for expenditure within the activity that generated the receipt. Historically, final estimated
receipts have varied significantly from the original estimate at the beginning of the fiscal year. State
agencies expend departmental receipts prior to spending State tax and non- tax supported appropriations.
If departmental receipts are higher than expected, appropriated dollars may go unspent and be re-appropriated
in a subsequent fiscal year.
Final Budget versus Actual Experience. The Schedule of Revenues, Expenditures and Changes in
Unreserved Fund Balance— Budget and Actual ( Budgetary Basis— Non- GAAP), General Fund is
intended to demonstrate legal compliance. In a typical year of General Fund budgetary operations,
federal and intra- governmental transactions will be significantly under- realized with an offsetting
under- expenditure in the primary and secondary education; health and human services; and public
safety, corrections, and regulation. When departmental receipts reflect under- realized revenues, there is
an offsetting under- expenditure of dollars against total budgeted appropriations.
For fiscal year 2002, the State experienced a shortfall in tax and non- tax receipts on the order of
$ 1.55 billion. Typical with the experience of other state governments, the slowing national and state
economy, resulted in a general decline in tax collections. Net of refunds to taxpayers, individual
income taxes fell short of estimates by $ 1.04 billion, corporate income taxes were less than expected by
$ 177 million, sales and use tax was $ 90.5 million less than expected, and franchise tax was $ 192.7
million under budget estimates. Inheritance tax collections fell short of estimates by $ 25.4 million.
Higher unemployment, lower individual business and corporate earnings, and a declining stock market,
resulting in lower capital gains, represented the common thread in the general tax revenue decline.
In the effort to meet the State constitutional mandate of balancing the General Fund budget,
reductions of $ 789.2 million were implemented, with the remainder of the budget funded by $ 437.7
million of non- General Fund dollars, and $ 239.3 million transferred from the Savings Reserve account.
Budget reductions affecting the major General Fund functions of our State government were as
follows: general government, 9.9%; primary and secondary education, 1.8%; community colleges,
7.1%; public universities, 8.6%; health and human services, 3.9%; economic development, 12.9%;
environment and natural resources, 18.9%, public safety, correction, and regulation, 4.5%; and
agriculture, 12.5%.
Investment income fell short of estimated budgetary receipts by $ 34.2 million as a result of lower
General Fund cash available for investment and lower investment rates of return.
Our State manages the budget through the Office of State Budget and Management ( OSBM). For
fiscal year 2002, OSBM executed the necessary cuts in the budget by withholding portions of quarterly
allotments and by giving agencies targeted reductions in spending. The final budget for tax and non- tax
revenues is never amended without a special session of the General Assembly. The appropriation of
increases in departmental receipts is authorized by the General Assembly through special provision in
the biennial budget bill.
Each state has flexibility in how it decides to establish and execute its budget. For example, North
Carolina nets certain distributions of State funds to local governments and other entities directly out of
taxes, where other states may appropriate similar activities. Effective for fiscal year 2003, certain local
government distributions previously considered continuing State appropriations from State revenue
collections, will be accounted for and reported as local government funds.
Refunds to individual income taxpayers of $ 1.373 billion represented 15.9% of total gross individual
income collections for fiscal year 2002. Refunds to corporate taxpayers of $ 230.8 million represented
23.2% of gross corporate income tax collections. Refunds of sales and use tax totaled $ 398.7 million in
fiscal year 2002, or 6.8% of gross collections.
For fiscal year 2002, the General Fund again closed the year with an extremely low unreserved fund
balance. For the fiscal years ended June 30, 2000, 2001, and 2002, the ending unreserved fund balance
was zero, zero, and $ 3.8 million, respectively. To gain a sense of perspective, since 1965 unreserved
State of North Carolina 37
fund balance in the General Fund averaged $ 200 million per year, or 3.9% of total appropriation
expenditures, equivalent to 10 business days disbursements of appropriation expenditures. In the
decade of the 1990’ s, unreserved fund balance averaged $ 293 million, or 3.1% of appropriation
expenditures, equivalent to eight business days worth of disbursements of appropriation expenditures.
47
51
76
32
53
33
39
33
71
28
8
10
19
21
19
26
12
8
5
17
22
16 17 17
6
8
—
4
11 11
7
10
8
11
6
— — —
—
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
General Fund Budgetary Basis —
Number of Days of Appropriation Expenditures in Unreserved
Fund Balance
at June 30
Days
Fiscal Year
North Carolina is required by its constitution to balance the General Fund on a budgetary basis. The
budgetary basis reserved fund balance totaled $ 390.1 million ( see table below). See the notes to
required supplemental information for a more detailed discussion of our State’s budgetary process. The
following schedule summarizes current year changes in the budgetary reserve accounts. Amounts are
expressed in thousands.
Transfers Transfers to
from General Fund
Balance General Fund Unreserved Balance
General Fund June 30, Unreserved Unbudgeted Fund Unbudgeted June 30,
Reserved Fund Balance 2001 Fund Balance Revenues Balance Expenditures 2002
Savings..............................$ 157,522 $ 90,000 $ 7 ,352 $ ( 239,342) $ ( 15,532)$ —
Retirees' health premium... 53,895 — — — ( 3,085) 50,810
N. C. Railroad acquisition... 31,582 — — — ( 9,501) 22,081
Disproportionate share....... 1,170 — — — ( 1,170) —
Disaster relief..................... 448,608 — 123,583 — ( 254,956) 317,235
Exec. Order # 3................... 178,472 2,911 — — ( 181,383) —
Exec. Order # 19................. — — 440,915 ( 324,915) ( 116,000) —
Total...................................$ 871,249 $ 92,911 $ 5 71,850 $ ( 564,257) $ ( 581,627) $ 390,126
Increases ( Decreases)
38 State of North Carolina
Highway
Fund
Highway
Trust Fund
General Fund Fiscal Year 2003 Budget. The General Fund State appropriations budget for fiscal year
2003 is $ 14.35 billion. The General Assembly took action on several revenue enhancements for fiscal
year 2003, totaling $ 866.1 million. The most significant action was the accelerated repeal of the local
government reimbursements paid to replace revenues lost by local governments as the result of actions
taken by the State ($ 333.4 million for fiscal year 2003). Local governments were granted the authority
to establish a one- half cent local option sales tax to replace the reimbursements. Additionally, the
annual transfer from the Highway Trust Fund was increased by $ 205 million for 2002- 2003, of which
$ 80 million is to be on a recurring basis, with $ 125 million established a one- time advance to be repaid
in the future. Additional non- recurring transfers of $ 38 million, from the Tobacco Trust Fund, and $ 40
million, from the Health and Wellness Trust Fund were approved by the General Assembly for fiscal
year 2003. The following table summarizes the fiscal year 2003 revenue enhancements. Amounts are
expressed in millions.
Amount
Local government reimbursements cancelled ............................................ $ 333.4
Highway Trust Fund Transfer — advance .................................................. 125.0
Business tax revisions ................................................................................ 90.0
Highway Trust Fund Transfer — recurring adjustment ............................... 80.0
Delay 2001 tax breaks ................................................................................ 51.7
Transfer from Health and Wellness Trust Fund — non- recurring ............... 40.0
Departmental fee increases ........................................................................ 39.3
Transfer from Tobacco Trust Fund — non- recurring .................................. 38.0
Department of Revenue — Project Collect Tax .......................................... 32.5
Special Fund / Trust Fund Transfers — non- recurring ............................... 20.4
Internal Revenue Code Conformity ............................................................ 15.8
Total ............................................................................................................
$ 866.1
The Highway Fund accounts for most of the activities of the North Carolina Department of
Transportation, including the construction and maintenance of the State primary, secondary, and urban
road systems. The principal revenues of the Highway Fund are gasoline ( motor fuels) taxes, motor
vehicle registration fees, driver's license fees, and federal aid.
While the effects of the slowing economy have had an impact on business travel, commercial
transportation and general consumer travel and tourism, the States highway fund taxes and fees have
still shown growth. Although total revenue of the Highway Fund declined by $ 29 million, or 1.3%,
gasoline tax increased by $ 20 million, or 2.3%, and fees, licenses, and fines increased by $ 18.8 million,
or 4.8%. The largest decrease came in the decline of accrued federal funds, $ 52 million, or 5.8%.
Expenditures for highway construction, maintenance, and administration grew by $ 103 million, or
4.5%.
The Highway Trust Fund was established to provide a dedicated funding mechanism to meet
highway construction needs for North Carolina. Taxes were increased for the specific purpose of
improving identified primary transportation corridors within the State and for the completion of urban
loops around seven major metropolitan areas. Additionally, this fund provides supplemental allocations
for secondary road construction and supplemental assistance to municipalities for local street projects.
The fund also makes transfers to the General Fund and the Highway Fund. The principal revenues of
the Highway Trust Fund are highway use taxes, motor fuels taxes, and various title and registration
fees.
Total revenues of the Highway Trust Fund declined by $ 10.8 million, or 1%. The decline in
investment and interest earnings of $ 26.7 million, as a result of lower cash balances to invest, had the
largest impact on the Highway Trust Fund. Gasoline tax increased by $ 8.3 million, or 2.9%, and
highway use tax grew by $ 9 million, or 1.7%. Transportation related expenditures of the Highway
Trust Fund grew by $ 63.5 million, or 11.9%.
State of North Carolina 39
Unemployment
Compensation
Fund
The Unemployment Compensation Fund accounts for the State’s unemployment insurance program,
which is part of a national system established to provide temporary benefit payments to eligible
unemployed workers. The unemployment benefits are financed primarily by State unemployment
insurance taxes, distributions of federal unemployment insurance taxes, and federal funding for the
unemployment benefits.
For fiscal year 2002, employer contributions grew by $ 52.5 million, or 13.8%. Federal Funds grew
by $ 361.3 million, or 2,465%. The drastic growth in revenues was driven by a slowing economy and an
increasing unemployment rate in North Carolina. Unemployment benefits paid in fiscal year 2002
totaled $ 1.3 billion, a 96.6% increase in payments over fiscal year 2001. Net assets of $ 793 million at
June 30, 2002 represented a decline of $ 516.2 million, or 39.4%.
CAPITAL ASSETS AND DEBT ADMINISTRATION
Capital Assets: At the end of the fiscal year 2002, the Statement of Net Assets reflected $ 22.382
billion, net of accumulated depreciation, in a broad range of capital assets ( see the table below).
Depreciation charges for this fiscal year totaled $ 515.7 million.
Governmental Business- type Total Primary
Activities Activities Government
Land............................................. $ 7,209 $ 3 $ 7,212
Buildings....................................... 1,330 15 1,345
Machinery and equipment............. 576 1 577
General infrastructure................... 88 7 95
State highway system................... 11,547 — 11,547
Other............................................ 135 — 135
Subtotal....................................... 20,885 26 20,911
Construction in progress............... 1,455 16 1,471
Total............................................. $ 22,340 $ 4 2 $ 22,382
Capital Assets, Net as of June 30, 2002
( In Millions)
The effort to manage the State’s General Fund budget shortfall resulted in the postponement of most
construction and maintenance activity. The State’s fiscal year 2001- 2002 capital outlay budget
included spending $ 32.9 million for new projects at various state agency buildings. More detailed
information about the State’s capital assets is presented in Note 4 to the financial statements, and in
Note 17.
For fiscal year 2002, the State reflected $ 11.5 billion ( net of accumulated depreciation) of highway
system infrastructure, an increase of $ 917 million ( net), or 8.6%. Depreciation expense for the highway
system was $ 315 million for fiscal year 2002. Based on the requirements of GASB Statement No. 34,
governments were only required to capitalize major infrastructure systems back to July 1, 1980. The
North Carolina Department of Transportation was able to recall and capitalize construction expenditure
information to include highway system construction costs since 1953.
40 State of North Carolina
Long- term Debt: The State authorizes, issues, and sells debt obligations. General obligation bonds,
issued by the State, are backed by the full faith and credit of the State. The State also issues revenue
dedicated bonded debt, whose payment for principal and interest comes solely out of funds that receive
legally restricted revenues. More detailed information regarding the State’s long- term obligations is
presented in Note 6 to the financial statements.
Governmental Business- type Total Primary
Activities Activities Government
General obligation bonds
( backed by the state)................... $ 3,478 $ — $ 3,478
Revenue bonds and notes
( backed by specific tax and
fee revenues).............................. — 10 10
Total............................................... $ 3,478 $ 1 0 $ 3,488
Outstanding Bonded Debt as of June 30, 2002
( In Millions)
During fiscal year 2002, the State issued general obligation debt totaling $ 605 million ($ 300 million
for capital maintenance and expanding the capacity of universities and community colleges; $ 215
million for clean water; $ 55 million for local school construction; and $ 35 million for natural gas).
The State is in the process ($ 300 million referred to above issued in fiscal year 2002) of fulfilling a
significant commitment to increase the capacity of the universities and community colleges and to
provide funding for renovations. In November 2000, the State’s voters approved $ 3.1 billion of
University and Community College general obligation bonds. The General Assembly has
predetermined the specific building projects to be funded by the bond proceeds. At June 30, 2002, there
was a remaining bond authorization of $ 2.55 billion of higher education bonds yet to be issued,
constituting 82.3% of the original $ 3.1 billion higher education bond authorization.
State of North Carolina 41
Bond Ratings
The State’s general obligation bonds are rated Aa1 by Moody’s, AAA by Standard & Poors, and
AAA by Fitch. During the fiscal year, Moody’s Investors Services downgraded the State of North
Carolina’s general obligation rating to Aa1, from Aaa. According to Moody’s, the primary reasons for
the downgrade were the State’s continued budget pressure, reliance on non- recurring revenues, and
weakened balance sheet. Also, Moody’s commented that the task of restoring structural budget balance
and rebuilding reserves faces political and economic obstacles.
Limitations on Debt
The limitations on the increase of State debt are contained in the State Constitution, Article 5,
Section 3. This section restricts the General Assembly from contracting debts secured by a pledge of
the faith and credit of the State, unless approved by a majority of the qualified voters of the State except
for:
1. To fund or refund a valid existing debt;
2. To supply an unforeseen deficiency in the revenue;
3. To borrow in anticipation of the collection of taxes due and payable within the current fiscal year to
an amount not exceeding 50 percent of such taxes;
4. To suppress riots or insurrections, or to repel invasions;
5. To meet emergencies immediately threatening the public health or safety, as conclusively
determined in writing by the Governor;
6. For any other lawful purposes, to the extent of two- thirds of the amount by which the State's
outstanding indebtedness shall have been reduced during the next preceding biennium.
No short- term borrowing occurred in fiscal year 2002.
ECONOMIC CONDITION AND OUTLOOK
The unemployment rate has dropped from 6.9% in April to 6.0% in October, and we have seen
improvement in the unemployment claims numbers. State sales tax receipts during the quarter ending
September 30 were up 1.7% over the same quarter last year and increased 2.3% during the second
calendar quarter. This compares to - 2.0% for the first quarter and - 3.5% for the final quarter of 2001.
Unit sales of cars and light trucks rose 2.9% in May and June this year.
Even with the recent improvements, the State is budgeting on the basis of a continued sluggish
recovery. As the state has diversified away from the traditional manufacturing industries ( textiles,
apparel, furniture, and tobacco) to electronics and other technology- oriented companies, we have
become more vulnerable to problems in the new sectors.
Key Economic Forecast Variables
(% Change Unless Noted)
Fiscal Year 2002
Actual
Fiscal Year 2003
Budgeted
North Carolina
Total Employment - 1.1% - 1.4%
Manufacturing Employment - 7.1% - 4.5%
Unemployment Rate 6.3% 7.4%
Personal Income 1.3% 1.8%
42 State of North Carolina
REQUESTS FOR INFORMATION
This financial report is designed to provide our citizens, taxpayers, customers, investors, and
creditors with a general overview of the State’s finances and to demonstrate the State’s accountability
for the money it receives. If you have any questions about this report or need additional financial
information, contact the North Carolina Office of the State Controller, Financial Reporting Section at
( 919) 981- 5454.
The State’s component units issue their own separately issued audited financial statements. These
statements may be obtained by directly contacting the component unit. A list of component units and
contact information is available in Note 1, beginning on page 64.
BASIC
FINANCIAL
STATEMENTS
44 State of North Carolina
THIS PAGE INTENTIONALLY LEFT BLANK.
GOVERNMENT- WIDE
FINANCIAL
STATEMENTS
46 State of North Carolina
STATEMENT OF NET ASSETS
June 30, 2002 Exhibit A- 1
( Dollars in Thousands)
Primary Government
Governmental Business- type Component
Activities Activities Total Units
ASSETS
Cash and cash equivalents ( Note 3)............................... $ 3 ,628,804 $ 7 05,163 $ 4 ,333,967 $ 1 ,877,906
Investments ( Note 3)...................................................... 4 18,848 3 5,888 4 54,736 3 ,058,029
Securities lending collateral ( Note 3)............................... 3 ,674,464 2 00,009 3 ,874,473 —
Receivables, net.............................................................. 1 ,765,221 1 97,621 1 ,962,842 5 84,511
Due from fiduciary funds ( Note 7).................................... 5 ,681 — 5 ,681 —
Due from component units ( Note 7)................................. 9 ,391 — 9 ,391 584
Due from primary government ( Note 7)........................... — — — 1 55,677
Internal balances............................................................. 390 ( 390) — —
Inventories...................................................................... 1 34,715 416 1 35,131 6 5,880
Prepaid items.................................................................. 6 ,965 2 ,519 9 ,484 1 1,524
Advances to component units ( Note 7)............................ 4 7,081 — 4 7,081 —
Notes receivable............................................................. 5 22,684 — 5 22,684 2 ,445,722
Endowment investments................................................. 4 9,730 — 4 9,730 —
Deferred charges............................................................. — 129 129 1 7,605
Securities held in trust..................................................... 4 8,432 — 4 8,432 —
Pension assets ( Note 9).................................................. 37 — 37 —
Capital assets, net ( Note 4)............................................. 2 2,339,580 4 2,358 2 2,381,938 5 ,120,036
Total Assets ................................................................... 3 2,652,023 1 ,183,713 3 3,835,736 1 3,337,474
LIABILITIES
Accounts payable and accrued liabilities......................... 1 ,019,291 1 8,335 1 ,037,626 5 49,201
Medical claims payable................................................... 7 09,514 — 7 09,514 4 ,233
Unemployment benefits payable..................................... — 5 3,966 5 3,966 —
Tax refunds payable........................................................ 9 45,426 — 9 45,426 —
Obligations under securities lending................................ 3 ,674,464 2 00,009 3 ,874,473 —
Interest payable............................................................... 4 4,786 25 4 4,811 2 2,825
Due to fiduciary funds ( Note 7)........................................ 8 ,673 — 8 ,673 —
Due to component units ( Note 7)..................................... 1 55,677 — 1 55,677 584
Due to primary government ( Note 7)............................... — — — 1 8,218
Unearned revenue........................................................... 2 73,318 1 4,882 2 88,200 8 3,456
Advance from primary government ( Note 7).................... — — — 5 5,908
Obligations under reverse repurchase agreements......... — — — 3 4,995
Deposits payable............................................................. 176 141 317 2 2,040
Funds held for others...................................................... 9 4,393 — 9 4,393 3 98,684
Long- term liabilities ( Note 6):
Due within one year...................................................... 2 27,080 268 2 27,348 2 09,672
Due in more than one year........................................... 3 ,484,516 9 ,904 3 ,494,420 3 ,733,590
Total Liabilities................................................................ 1 0,637,314 2 97,530 1 0,934,844 5 ,133,406
NET ASSETS
Invested in capital assets, net of related debt.................. 2 2,025,039 3 8,267 2 2,063,306 3 ,851,666
Restricted for:
Nonexpendable:
Environment and natural resources........................... 4 3,846 — 4 3,846 —
Higher education....................................................... — — — 5 83,336
Expendable:
Primary and secondary education............................. 1 5,811 — 1 5,811 —
Higher education....................................................... 4 03,934 — 4 03,934 1 ,931,330
Health and human services....................................... 3 9,210 — 3 9,210 —
Economic development............................................. 5 3,389 — 5 3,389 2 31,901
Environment and natural resources........................... 4 4,125 — 4 4,125 —
Public safety, corrections, and regulation.................. 1 8,151 — 1 8,151 —
Transportation........................................................... 8 03,385 — 8 03,385 —
Unemployment compensation................................... — 7 93,118 7 93,118 —
Other purposes......................................................... 1 82,921 4 ,319 1 87,240 7 ,192
Unrestricted..................................................................... ( 1,615,102) 5 0,479 ( 1,564,623) 1 ,598,643
Total Net Assets.............................................................. $ 2 2,014,709 $ 8 86,183 $ 2 2,900,892 $ 8 ,204,068
The accompanying Notes to the Financial Statements are an integral part of this statement.
State of North Carolina 47
THIS PAGE INTENTIONALLY LEFT BLANK.
48 State of North Carolina
STATEMENT OF ACTIVITIES
For the Fiscal Year Ended June 30, 2002
( Dollars in Thousands)
Operating Capital
Charges for Grants and Grants and Net ( Expense)
Functions/ Programs Expenses Services Contributions Contributions Revenue
Primary Government:
Governmental Activities:
General government................................................... $ 874,208 $ 184,982 $ 1 28,677 $ 2,544 $ ( 558,005)
Primary and secondary education.............................. 6,802,979 14,648 7 20,923 — ( 6,067,408)
Higher education........................................................ 2,519,703 789 1 5,281 — ( 2,503,633)
Health and human services........................................ 10,376,807 133,275 7 ,014,086 — ( 3,229,446)
Economic development.............................................. 469,102 21,828 2 44,531 — ( 202,743)
Environment and natural resources............................ 627,369 92,604 1 58,720 39,192 ( 336,853)
Public safety, corrections, and regulation................... 2,109,487 327,457 2 08,348 30,863 ( 1,542,819)
Transportation............................................................ 1,530,870 524,198 2 82,519 638,690 ( 85,463)
Agriculture.................................................................. 121,729 13,178 1 4,169 2,795 ( 91,587)
Interest on long- term debt.......................................... 148,595 — — — ( 148,595)
Total Governmental Activities............................. 25,580,849 1,312,959 8 ,787,254 714,084 ( 14,766,552)
Business- type Activities:
Unemployment Compensation................................... 1,336,718 433,364 4 34,439 — ( 468,915)
Other business- type activities..................................... 25,431 27,477 4 ,321 1,121 7,488
Total Business- type Activities............................. 1,362,149 460,841 4 38,760 1,121 ( 461,427)
Total Primary Government............................................. $ 26,942,998 $ 1,773,800 $ 9 ,226,014 $ 715,205 $ ( 15,227,979)
Component Units:
Golden LEAF Foundation........................................... $ 11,366 $ — $ ( 12,995)$ — $ ( 24,361)
University of North Carolina System........................... 5,132,174 3,045,092 3 91,424 35,484 ( 1,660,174)
Community Colleges.................................................. 1,155,149 183,081 3 45,531 54,361 ( 572,176)
N. C. Housing Finance Agency................................... 161,449 170,778 — — 9,329
N. C. State Education Assistance Authority................. 101,819 69,352 5 3,254 — 20,787
Other component units............................................... 197,548 39,958 1 0,774 11,044 ( 135,772)
Total Component Units................................................... $ 6,759,505 $ 3,508,261 $ 7 87,988 $ 100,889 $ ( 2,362,367)
The accompanying Notes to the Financial Statements are an integral part of this statement.
Program Revenues
State of North Carolina 49
STATEMENT OF ACTIVITIES ( continued)
For the Fiscal Year Ended June 30, 2002 Exhibit A- 2
( Dollars in Thousands)
25XX............. Total
Governmental Business- type Component
Activities Activities Total Units
Changes in Net Assets:
Net ( expense) revenue $ ( 14,766,552) $ ( 461,427) $ ( 15,227,979) $ ( 2,362,367)
General Revenues:
Taxes
Individual income tax.............................................. 7,234,431 — 7 ,234,431 —
Corporate income tax............................................. 599,382 — 5 99,382 —
Sales and use tax................................................... 3,778,873 — 3 ,778,873 —
Gasoline tax........................................................... 1,212,788 — 1 ,212,788 —
Franchise tax.......................................................... 590,992 — 5 90,992 —
Highway use tax..................................................... 555,320 — 5 55,320 —
Insurance tax.......................................................... 347,893 — 3 47,893 —
Beverage tax.......................................................... 200,593 — 2 00,593 —
Inheritance tax........................................................ 106,491 — 1 06,491 —
Other taxes............................................................. 278,740 — 2 78,740 —
Tobacco settlement.................................................... 175,836 — 1 75,836 —
Unrestricted investment earnings............................... 139,350 — 1 39,350 —
State operating aid..................................................... — — — 2,473,602
State capital aid.......................................................... — — — 217,306
Miscellaneous............................................................ 57,484 — 5 7,484 2,384
Contributions to permanent funds................................... 2,019 — 2 ,019 —
Contributions to term and permanent endowments........ — — — 31,148
Transfers........................................................................ 47,957 ( 47,957) — —
Total general revenues and transfers............................. 15,328,149 ( 47,957) 1 5,280,192 2,724,440
Change in net assets...................................................... 561,597 ( 509,384) 5 2,213 362,073
Net assets — July 1, as restated.................................... 21,453,112 1,395,567 2 2,848,679 7,841,995
Net assets — June 30.................................................... $ 22,014,709 $ 886,183 $ 2 2,900,892 $ 8,204,068
Primary Government
50 State of North Carolina
THIS PAGE INTENTIONALLY LEFT BLANK.
FUND FINANCIAL
STATEMENTS
52 State of North Carolina
BALANCE SHEET
GOVERNMENTAL FUNDS
June 30, 2002 Exhibit B- 1
( Dollars in Thousands)
Highway Other Total
Highway Trust Governmental Governmental
General Fund Fund Funds Funds
ASSETS
Cash and cash equivalents ( Note 3)............................... $ 7 82,364 $ 4 73,860 $ 5 48,061 $ 1 ,761,147 $ 3 ,565,432
Investments ( Note 3)...................................................... 1 ,762 — — 3 96,053 3 97,815
Securities lending collateral ( Note 3)............................... 1 ,949,795 4 57,674 4 05,796 8 40,379 3 ,653,644
Receivables, net:
Taxes receivable.......................................................... 7 45,719 8 2,808 3 0,070 2 ,163 8 60,760
Accounts receivable..................................................... 1 05,399 2 ,795 3 29 2 8,921 1 37,444
Intergovernmental receivable....................................... 6 59,024 2 6,151 4 73 1 0,307 6 95,955
Interest receivable........................................................ 8 ,720 2 ,008 2 ,072 7 ,776 2 0,576
Contributions receivable............................................... 1 9,987 — — — 1 9,987
Other receivables......................................................... — 6 ,275 — 1 7 6 ,292
Due from fiduciary funds ( Note 7).................................... 5 ,457 — — 2 16 5 ,673
Due from other funds ( Note 7)......................................... 3 ,826 7 8,227 3 7 2 6,039 1 08,129
Due from component units ( Note 7)................................. 5 ,101 — — 2 ,659 7 ,760
Inventories...................................................................... 4 3,772 6 3,332 — 2 7,333 1 34,437
Prepaid items.................................................................. — — — 5 7 5 7
Advances to other funds ( Note 7).................................... — — 2 ,624 — 2 ,624
Advances to component units ( Note 7)............................ 2 2,081 — — 2 5,000 4 7,081
Notes receivable............................................................. 2 ,952 — — 5 19,732 5 22,684
Securities held in trust..................................................... 5 88 1 2,920 — 3 4,924 4 8,432
Endowment investments................................................. — — — 4 9,730 4 9,730
Total Assets.................................................................... $ 4 ,356,547 $ 1 ,206,050 $ 9 89,462 $ 3 ,732,453 $ 10,284,512
LIABILITIES AND FUND BALANCES
Liabilities:
Accounts payable and accrued liabilities:
Accounts payable......................................................... $ 6 3,739 $ 1 46,873 $ 3 7,950 $ 4 9,879 $ 2 98,441
Accrued payroll............................................................ 5 ,072 2 8,632 — 1 ,347 3 5,051
Intergovernmental payable........................................... 5 17,734 9 0,454 4 2,750 9 ,696 6 60,634
Claims payable............................................................. — — — 2 1,658 2 1,658
Medical claims payable................................................... 7 09,514 — — — 7 09,514
Tax refunds payable........................................................ 9 45,426 — — — 9 45,426
Obligations under securities lending................................ 1 ,949,795 4 57,674 4 05,796 8 40,379 3 ,653,644
Interest payable............................................................... 8 88 — — — 8 88
Due to fiduciary funds ( Note 7)........................................ 8 ,673 — — — 8 ,673
Due to other funds ( Note 7)............................................. 1 3,793 8 ,159 7 6,944 2 1,162 1 20,058
Due to component units ( Note 7)..................................... 1 0,791 2 18 — 1 44,067 1 55,076
Deferred revenue............................................................ 4 78,933 2 ,352 3 7 1 8,242 4 99,564
Advance from other funds ( Note 7).................................. — 2 ,624 — — 2 ,624
Deposits payable............................................................. 1 35 3 0 — 1 1 1 76
Funds held for others...................................................... 6 05 5 8,857 — 3 4,931 9 4,393
Total Liabilities................................................................ 4 ,705,098 7 95,873 5 63,477 1 ,141,372 7 ,205,820
Fund Balances:
Reserved ( Note 8)........................................................ 2 27,767 5 3,560 — 1 ,045,479 1 ,326,806
Unreserved, reported in:
General Fund............................................................ ( 576,318) — — — ( 576,318)
Special Revenue Funds............................................ — 3 56,617 4 25,985 1 ,471,625 2 ,254,227
Capital Projects Funds.............................................. — — — 7 3,751 7 3,751
Permanent Funds...................................................... — — — 2 26 2 26
Total Fund Balance......................................................... ( 348,551) 4 10,177 4 25,985 2 ,591,081 3 ,078,692
Total Liabilities and Fund Balances................................. $ 4 ,356,547 $ 1 ,206,050 $ 9 89,462 $ 3 ,732,453 $ 10,284,512
The accompanying Notes to the Financial Statements are an integral part of this statement.
State of North Carolina 53
RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET
TO THE STATEMENT OF NET ASSETS
June 30, 2002 Exhibit B- 1a
( Dollars in Thousands)
Total fund balances - governmental funds ( see Exhibit B- 1) $ 3,078,692
Amounts reported for governmental activities in the Statement of Net Assets are different
because:
- Capital assets used in governmental activities are not financial resources and,
therefore, are not reported in the funds ( see Note 4). These consist of:
Cost of capital assets ( excluding internal service funds)..................................................... $ 2 7,845,415
Less: Accumulated depreciation ( excluding internal service funds)..................................... ( 5,593,147)
Net capital assets........................................................................................................ 22,252,268
- Some assets, such as receivables, are not available soon enough to pay for current-period
expenditures and thus, are offset by deferred revenue in the governmental
funds. 228,786
- Pension assets, resulting from contributions in excess of the annual required
contribution are not financial resources and therefore are not reported in
the funds. ( See Note 9) 37
- Long- term debt instruments, such as bonds and notes payable, are not due and
payable in the current period and, therefore, the outstanding balances are not reported
in the funds ( see Note 6). Also, unamortized debt premiums are reported in the
Statement of Net Assets but are not reported in the funds. These balances consist of:
General obligation bonds payable....................................................................................... ( 3,467,325)
Unamortized debt premiums ( to be amortized as interest expense).................................... ( 13,709)
Less: Unamortized debt discounts ( to be amortized as interest expense)........................... 3,081
Notes payable..................................................................................................................... ( 11,753)
Capital leases payable........................................................................................................ ( 216)
Net long- term debt....................................................................................................... ( 3,489,922)
- Other liabilities not due and payable in the current period and, therefore, not reported
in the funds ( see Note 6) consist of:
Accrued interest payable..................................................................................................... ( 43,898)
Compensated absences ( excluding internal service funds)................................................. ( 207,563)
Obligations for workers compensation................................................................................. ( 7,145)
Arbitrage rebate payable..................................................................................................... ( 1,287)
Net pension obligation......................................................................................................... ( 3,775)
Total other liabilities..................................................................................................... ( 263,668)
- Internal service funds are used by management to charge the costs of certain
activities to individual funds. The assets and liabilities of the internal service funds
are included in governmental activities in the Statement of Net Assets ( see Exhibit B- 3). 208,516
Total net assets - governmental activities ( see Exhibit A- 1) $ 2 2,014,709
The accompanying Notes to the Financial Statements are an integral part of this statement.
54 State of North Carolina
STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES
GOVERNMENTAL FUNDS
For the Fiscal Year Ended June 30, 2002 Exhibit B- 2
( Dollars in Thousands)
Highway Other Total
Highway Trust Governmental Governmental
General Fund Fund Funds Funds
Revenues:
Taxes:
Individual income tax................................................... $ 7 ,219,794 $ — $ — $ 4 54 $ 7,220,248
Corporate income tax.................................................. 5 48,046 — — 5 4,330 602,376
Sales and use tax........................................................ 3 ,766,285 — — 1 2,900 3,779,185
Gasoline tax................................................................ — 8 89,919 2 96,964 2 6,613 1,213,496
Franchise tax............................................................... 5 92,259 — — — 592,259
Highway use tax.......................................................... — — 5 55,320 — 555,320
Insurance tax............................................................... 3 40,785 — — 7 ,108 347,893
Beverage tax............................................................... 2 00,593 — — — 200,593
Inheritance tax............................................................. 1 04,799 — — — 104,799
Other taxes.................................................................. 1 81,657 — — 9 6,970 278,627
Federal funds................................................................. 7 ,266,016 8 45,347 — 3 47,981 8,459,344
Local funds..................................................................... 6 82,310 7 ,269 — 1 2,497 702,076
Investment earnings....................................................... 1 88,310 2 2,866 1 0,183 1 13,723 335,082
Interest earnings on loans.............................................. 2 1 1 27 3 1,526 1 5,747 47,421
Sales and services......................................................... 6 1,259 7 ,060 — 1 26,229 194,548
Rental and lease of property.......................................... 7 ,102 1 3,839 1 ,790 1 ,628 24,359
Fees, licenses, and fines................................................ 2 37,236 4 08,198 9 0,968 1 28,510 864,912
Tobacco settlement........................................................ 1 75,836 — — — 175,836
Contributions, gifts, and grants....................................... 3 3,688 3 ,530 4 88 5 6,096 93,802
Funds escheated............................................................ — — — 9 0,181 90,181
Miscellaneous................................................................ 1 18,690 9 ,466 1 95 1 7,536 145,887
Total revenues......................................................... 2 1,724,686 2 ,207,621 9 87,434 1 ,108,503 26,028,244
Expenditures:
Current:
General government.................................................... 7 41,605 — — 6 7,793 809,398
Primary and secondary education............................... 6 ,495,702 — — 3 06,960 6,802,662
Higher education......................................................... 2 ,296,331 — — 2 23,293 2,519,624
Health and human services......................................... 1 0,333,124 — — 6 5,262 10,398,386
Economic development............................................... 1 88,617 — — 3 10,027 498,644
Environment and natural resources............................. 2 01,369 — — 3 73,502 574,871
Public safety, corrections, and regulation.................... 1 ,809,322 — — 2 60,844 2,070,166
Transportation............................................................. — 2 ,396,459 5 95,728 — 2,992,187
Agriculture................................................................... 7 3,176 — — 4 9,161 122,337
Capital outlay................................................................. — — — 1 26,011 126,011
Debt service:
Principal retirement..................................................... 1 63,723 — 1 6,675 — 180,398
Interest........................................................................ 1 38,148 — 9 ,432 — 147,580
Bond issuance costs................................................... 4 77 — — 2 57 734
Total expenditures.................................................... 2 2,441,594 2 ,396,459 6 21,835 1 ,783,110 27,242,998
Excess revenues over ( under) expenditures................... ( 716,908) ( 188,838) 3 65,599 ( 674,607) ( 1,214,754)
Other Financing Sources ( Uses):
Bonds issued................................................................. — — — 6 05,000 605,000
Other debt issued........................................................... 4 ,832 — — — 4,832
Premium on debt issued................................................. — — — 1 4,733 14,733
Capital leases................................................................. 2 16 — — — 216
Sale of capital assets..................................................... 5 ,950 5 47 1 ,003 5 ,070 12,570
Transfers in.................................................................... 6 16,871 4 00,843 — 4 60,594 1,478,308
Transfers out.................................................................. ( 230,499) ( 197,956) ( 641,170) ( 344,793) ( 1,414,418)
Total other financing sources ( uses)......................... 3 97,370 2 03,434 ( 640,167) 7 40,604 701,241
Net change in fund balances.......................................... ( 319,538) 1 4,596 ( 274,568) 6 5,997 ( 513,513)
Fund balances — July 1, as restated ( Note 19).............. ( 28,086) 3 96,054 7 00,553 2 ,526,882 3,595,403
Increase ( decrease) in reserve for related assets........... ( 927) ( 473) — ( 1,798) ( 3,198)
Fund balances — June 30.............................................. $ ( 348,551) $ 4 10,177 $ 4 25,985 $ 2 ,591,081 $ 3,078,692
The accompanying Notes to the Financial Statements are an integral part of this statement.
State of North Carolina 55
RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES,
AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS
TO THE STATEMENT OF ACTIVITIES
June 30, 2002 Exhibit B- 2a
( Dollars in Thousands)
Net change in fund balances - total governmental funds ( see Exhibit B- 2) $ ( 513,513)
Amounts reported for governmental activities in the Statement of Activities are different
because:
- Capital outlays are reported as expenditures in governmental funds. However, in the
Statement of Activities, the cost of capital assets is allocated over their estimated
useful lives as depreciation expense. In the current period, these amounts are:
Capital outlays ( including construction- in- progress) ............................................................ $ 1,979,924
Less: Depreciation expense ................................................................................................ ( 459,627)
Net capital outlay adjustment ....................................................................................... 1,520,297
- Proceeds from the sale of capital assets increase financial resources in the funds,
whereas in the Statement of Activities only the gain or loss on sale is reported. This
adjustment reduces the proceeds by the book value of the capital assets sold. ( 44,841)
- Long- term debt proceeds provide current financial resources to governmental funds,
while the repayment of the related debt principal consumes those financial resources.
These transactions, however, have no effect on net assets. Also, governmental funds
report the effect of premiums and similar items when debt is first issued, whereas these
amounts are deferred and amortized in the Statement of Activities. In the current period,
these amounts consist of:
Debt issued:
Bonds and similar debt issued ......................................................................................... ( 609,832)
Capital lease financings ................................................................................................... ( 216)
Premiums on debt issued ................................................................................................ ( 14,506)
Principal repayments:
Bonds, notes, and similar debt ........................................................................................ 180,398
Net debt adjustments ................................................................................................... ( 444,156)
- Some revenues in the Statement of Activities do not provide current financial
resources and, therefore, are deferred in the funds. Also, revenues related to prior
periods that became available during the current period are reported in the funds but
are eliminated in the Statement of Activities. This amount is the net adjustment. 35,620
- Some expenses reported in the Statement of Activities do not require the use of
current financial resources and, therefore, are not recognized in the funds. Also,
some payments related to prior periods are recognized in the funds but are eliminated
in the Statement of Activities. In the current period, the net adjustments consist of:
Accrued interest .................................................................................................................. ( 2,039)
Compensated absences ...................................................................................................... 5,181
Workers compensation ....................................................................................................... ( 77)
Arbitrage rebate .................................................................................................................. 8,261
Net pension obligation ......................................................................................................... ( 419)
Amortization of deferred amounts ....................................................................................... 797
Net expense accruals .................................................................................................. 11,704
- Inventories of governmental funds are recorded as expenditures when purchased
but in the Statement of Activities are recorded as expenses when consumed. ( 3,198)
- Internal service funds are used by management to charge the costs of certain
activities to individual funds. The net revenues of internal service funds are
included with governmental activities in the Statement of Activities ( see Exhibit B- 4). ( 316)
Change in net assets - governmental activities ( see Exhibit A- 2) $ 561,597
The accompanying Notes to the Financial Statements are an integral part of this statement.
56 State of North Carolina
STATEMENT OF NET ASSETS
PROPRIETARY FUNDS
June 30, 2002 Exhibit B- 3
( Dollars in Thousands)
Governmental
Activities —
Unemployment Other Total Internal
Compensation Enterprise Enterprise Service
Fund Funds Funds Funds
ASSETS
Current Assets:
Cash and cash equivalents ( Note 3)............................ $ 6 70,073 $ 3 2,069 $ 7 02,142 $ 6 3,372
Restricted cash and cash equivalents ( Note 3)............ — 724 724 —
Investments ( Note 3)................................................... — 2 7,700 2 7,700 2 1,033
Restricted investments ( Note 3)................................... — 25 25 —
Securities lending collateral ( Note 3)........................... 1 73,899 2 6,110 2 00,009 2 0,820
Receivables:
Accounts receivable, net........................................... 1 9,232 918 2 0,150 2 4,126
Intergovernmental receivables.................................. 1 ,616 — 1 ,616 —
Interest receivable.................................................... 855 73 928 59
Premiums receivable................................................ — 1 ,016 1 ,016 21
Contributions receivable, net.................................... 1 73,724 113 1 73,837 —
Due from fiduciary funds ( Note 7)................................ — — — 8
Due from other funds ( Note 7)..................................... 9 — 9 1 7,028
Due from component units ( Note 7)............................. — — — 1 ,631
Inventories................................................................... — 416 416 278
Prepaid items.............................................................. — 2 ,519 2 ,519 6 ,908
Total current assets............................................... 1 ,039,408 9 1,683 1 ,131,091 1 55,284
Noncurrent Assets:
Restricted/ designated cash and
cash equivalents ( Note 3)......................................... — 2 ,297 2 ,297 —
Investments ( Note 3)................................................... — 52 52 —
Restricted investments ( Note 3)................................... — 8 ,111 8 ,111 —
Receivables:
Accounts receivable, net........................................... — — — 1
Contributions receivable, net.................................... — 74 74 —
Deferred charges......................................................... — 129 129 —
Capital assets, net ( Note 4)......................................... — 4 2,358 4 2,358 8 7,312
Total noncurrent assets......................................... — 5 3,021 5 3,021 8 7,313
Total Assets........................................................... 1 ,039,408 1 44,704 1 ,184,112 2 42,597
LIABILITIES
Current Liabilities:
Accounts payable and accrued liabilities:
Accounts payable..................................................... 4 ,694 357 5 ,051 2 ,806
Accrued payroll......................................................... — 64 64 469
Intergovernmental payable....................................... 548 — 548 —
Claims payable......................................................... 2 ,680 9 ,992 1 2,672 232
Unemployment benefits payable.................................. 5 3,966 — 5 3,966 —
Obligations under securities lending............................ 1 73,899 2 6,110 2 00,009 2 0,820
Interest payable........................................................... — 25 25 —
Due to other funds ( Note 7)......................................... 393 6 399 4 ,709
Due to component units ( Note 7)................................. — — — 601
Deferred revenue......................................................... 1 0,110 4 ,772 1 4,882 2 ,540
Deposits payable......................................................... — 141 141 —
Bonds payable - current............................................... — 235 235 —
Accrued vacation leave - current.................................. — 33 33 201
Total current liabilities............................................ 2 46,290 4 1,735 2 88,025 3 2,378
Noncurrent Liabilities:
Bonds payable, net...................................................... — 9 ,570 9 ,570 —
Accrued vacation leave................................................ — 334 334 1 ,703
Total noncurrent liabilities...................................... — 9 ,904 9 ,904 1 ,703
Total Liabilities....................................................... 2 46,290 5 1,639 2 97,929 3 4,081
NET ASSETS
Invested in capital assets, net of related debt................. — 3 8,267 3 8,267 8 7,312
Restricted for:
Unemployment compensation..................................... 7 93,118 — 7 93,118 —
Other purposes............................................................ — 4 ,319 4 ,319 —
Unrestricted.................................................................... — 5 0,479 5 0,479 1 21,204
Total Net Assets.................................................... $ 7 93,118 $ 9 3,065 $ 8 86,183 $ 2 08,516
The accompanying Notes to the Financial Statements are an integral part of this statement.
Business- type Activities —
Enterprise Funds
State of North Carolina 57
STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS
PROPRIETARY FUNDS
For the Fiscal Year Ended June 30, 2002 Exhibit B- 4
( Dollars in Thousands)
Governmental
Activities —
Unemployment Other Total Internal
Compensation Enterprise Enterprise Service
Fund Funds Funds Funds
Operating Revenues:
Employer unemployment contributions............ $ 4 33,364 $ — $ 4 33,364 $ —
Federal funds.................................................. 3 75,908 — 3 75,908 —
Sales and services.......................................... — 1 ,221 1 ,221 2 15,043
Sales and services used as security
for bonds...................................................... —